22
Accounting in a Global Market
Overview
Presently there is a dramatic shift toward the acceptance and use of International
Accounting Standards Board (IASB) accounting standards. The standards of the IASB
are called International Financial and Reporting Standards (IFRS). In 2007 the
Securities and Exchange Commission (SEC) approved the use of IASB standards for
the financial reports of non U.S. companies with shares traded on U.S. stock
exchanges. This change, which took effect on March 4, 2008, allows non-U.S.
companies to use IFRS instead of U.S. GAAP in their financial statement filings with the
SEC. And now, the SEC is reviewing a plan to require all U.S. publicly traded
companies to use IFRS.
Before March 4, 2008, foreign companies who wished to have their shares traded in the
United States had to have their financial statements reconciled to U.S. GAAP. The
purpose of this reconciliation process was to increase the comparability of financial
information produced by non-U.S. companies to financial information produced by U.S.
companies whose financial statements were produced in conformance to U.S. GAAP.
This reconciliation of foreign income into U.S. GAAP income was accomplished on the
SEC’s Form 20-F.
Finally, U.S. companies frequently have foreign operations which generate their own
financial statements. These foreign financial statements are frequently stated in the
local currencies of the foreign operations. These statements are translated back into
U.S. dollars (and U.S. GAAP) for consolidated financial accounting purposes. You will
likely encounter more of the details involved in foreign currency translation issues in an
advanced accounting course and/or textbook.
Learning Objectives
Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that
this section of the chapter is second nature to you before you attempt the homework, a
quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat
sheet” to the basic concepts and principles that must be mastered.
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Chapter 22
If after reading this section of the chapter you still don’t feel comfortable with all of the
Learning Objectives covered, you will need to spend additional time and effort reviewing
those concepts that you are struggling with.
The following “Tips, Hints, and Things to Remember” are organized according to the
Learning Objectives (LOs) in the chapter and should be gone over after reading each of
the LOs in the textbook.
Tips, Hints, and Things to Remember
LO1 – Understand the importance and potential impact of a common
worldwide set of accounting standards.
Why? Financial statements can be confusing to the non-specialist as it is. To
compound the confusion, financial statements can be in foreign languages, different
currencies, and accounted for using methods that differ from the local GAAP.
Globalization of business operations has increased the need to globalize accounting
standards. The globalization of accounting standards should help increase the
understandability of financial statements.
Without the globalization of accounting standards, it is difficult to compare the
performance of different firms which use different accounting rules to produce their
financial statements. This chapter shows how two companies using differing methods,
but performing the same, can end up with vastly different ratios based on those differing
methods.
LO2 – Outline the history of the International Accounting Standards Board
(IASB).
Why? It is important that you understand the history of IASB and its standards (IFRS)
because it is likely that more and more companies will be required to prepare their
financial statements using IFRS.
LO3 – Identify key differences between U.S. GAAP and IFRS.
Why? As IFRS gains increased acceptance, it is important that accounting students
have an understanding of both U.S. GAAP and IFRS. Once you understand U.S. GAAP,
the IFRS differences are reasonable alternatives that fit comfortably under the
conceptual umbrella of generally accepted accounting principles.
Chapter 22
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In 2008, the SEC published a Roadmap because of their anticipation of the mandatory
adoption of IFRS in the United States. Currently the SEC has revised their work plan
and no switch from U.S. GAAP to IFRS should occur until 2015, at the earliest.
LO4 – Convert foreign currency financial statements into U.S. dollars using
the translation method.
How? Translating financial statements into U.S. dollars is fairly common sensical.
Items that are for a period of time (i.e., income statement figures) use an average rate
for that period of time in the translation. Items that are for a point in time (i.e., balance
sheet figures, dividends, capital stock) use the rate on the date of the financial
statement, the date of the dividend, or the date when the stock was issued or acquired.
Since different dates are used, the balance sheet will not balance. The difference is the
translation adjustment and will be reported as part of equity. It will not show up on the
income statement. If remeasurement, rather than translation, was used, then the
difference would show up on the income statement as a foreign currency gain or loss.
The following sections, featuring a multiple choice question and a matching exercise,
along with solutions and approaches to arriving at the solutions, is intended to develop
your problem-solving and critical-thinking abilities. While learning through trial and error
can be effective for improving your quiz and exam scores, and it can be a more
interesting way to study than merely re-reading a chapter, that is only a secondary
objective in presenting this information in this format.
The main goal of the following sections is to get you thinking, “How can I best approach
this problem to arrive at the correct solution—even if I don’t know enough at this point to
easily arrive at the proper results?” There is not one simple approach that can be
applied to all questions to arrive at the right answer. Think of the following approaches
as possibilities, as tools that you can place in your problem-solving toolkit—a toolkit that
should be consistently added to. Some of the tools have yet to even be created or
thought of. Through practice, creative thinking, and an ever-expanding knowledge base,
you will be the creator of the additional tools.
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Chapter 22
Multiple Choice
MC22-1 (LO4) Fuji Company, a subsidiary of California Company, reported the
following information at the end of its first year of operations (all in yen):
Assets
Capital stock
Expenses
Liabilities
Revenues
¥110,000,000
5,500,000
41,000,000
97,500,000
48,000,000
Relevant exchange rates are as follows:
On the date the subsidiary stock was purchased
Average rate for the year
At year-end
$.085
.078
.075
As a result of the translation process, what amount is recorded on the financial
statements as the translation adjustment?
a. $21,000 debit adjustment
b. $76,000 debit adjustment
c. $21,000 credit adjustment
d. $76,000 credit adjustment
Chapter 22
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Matching
Matching 22-1 (LO1, LO4) Listed below are the terms and associated definitions from
the chapter for LO1 and LO4. Match the correct definition letter with each term number.
___ 1. translation
___ 2. remeasurement
___ 3. functional
currency
___ 4. translation
adjustment
___ 5. International
Organization of
Securities
Commissions
a. method of converting a foreign subsidiary’s financial
statements into U.S. dollars; used when most of the
subsidiary’s transactions are denominated in U.S. dollars
b. currency in which most of a foreign subsidiary’s
transactions are denominated
c. an association that regulates the world securities markets
d. method of converting a foreign subsidiary’s financial
statements into U.S. dollars; used when most of the
subsidiary’s transactions are denominated in the local
(foreign) currency
e. balancing figure to equate a foreign subsidiary’s U.S.
dollar debits and credits; can be thought of as an
unrealized gain or loss from the impact of exchange rate
changes on the U.S. dollar value of a foreign subsidiary’s
equity
Solutions, Approaches, and Explanations
MC22-1
Answer: b
Approach and explanation: First, compute all of the debits. Then, compute all of the
credits. Finally, see what is missing to make your debits and credits equal. That will be
your answer.
Debits:
Assets
Expenses
Total
Credits:
Liabilities
Capital stock
Revenues
Total
¥110,000,000 × .075
41,000,000 × .078
$ 8,250,000
3,198,000
$11,448,000
¥97,500,000 × .075
5,500,000 × .085
48,000,000 × .078
$ 7,312,500
467,500
3,744,000
$11,524,000
Adjustment = $76,000 missing debit ($11,524,000 – $11,448,000)
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Chapter 22
The $76,000 debit adjustment will show up as a reduction in equity and as a subtraction
to arrive at accumulated other comprehensive income. It can be thought of as a
deferred loss.
Matching 22-1
1.
d
2.
a
3.
b
4.
e
5.
c
Complete these terminology matching exercises without looking back at the textbook or
on to the glossary. After all, you probably won’t have those as a reference at test time.
Learning through trial and error causes the item to be learned better and to stick in your
memory longer than if you just look at the textbook, glossary, or a dictionary and “cook
book” the answers. Sure you may get the answer correct on your first attempt, but
missing something is sometimes best for retention. Don’t be afraid of failure while
studying and practicing.
Glossary
Note that Appendix C in the rear portion of the textbook contains a comprehensive
glossary for all of the terms used in the textbook. That is the place to turn to if you need
to look up a word but don’t know which chapter(s) it appeared in. The glossary below is
identical with one major exception: It contains only those terms used in Chapter 22. This
abbreviated glossary can prove quite useful when reviewing a chapter, when studying
for a quiz for a particular chapter, or when studying for an exam which covers only a few
chapters including this one. Use it in those instances instead of wading through the 19
pages of comprehensive glossary in the textbook trying to pick out just those words that
were used in this chapter.
functional currency Currency in which most of a foreign subsidiary’s transactions are
denominated.
International Organization of Securities Commissions (IOSCO) An association of
organizations, including the U.S. Securities and Exchange Commission, that
regulates the world securities markets.
remeasurement Method of converting a foreign subsidiary’s financial statements into
U.S. dollars; used when most of the subsidiary’s transactions are denominated in
U.S. dollars.
translation Method of converting a foreign subsidiary’s financial statements into U.S.
dollars; used when most of the subsidiary’s transactions are denominated in the
local (foreign) currency.
Chapter 22
22-7
translation adjustment Balancing figure to equate a foreign subsidiary’s U.S. dollar
debits and credits; can be thought of as an unrealized gain or loss from the impact of
exchange rate changes on the U.S. dollar value of a foreign subsidiary’s equity.