15
CHAPTER 15
GOING INTERNATIONAL
AND
INTERNATIONAL ACCOUNTING
STANDARDS
Slide 15-1
15
FOCUS OF CHAPTER 15
 Globalization of Business:
 Ways to Export
 Ways to Manufacture Overseas
 Reasons for Manufacturing Overseas
 International Accounting Standards:
 The Diversity of Worldwide GAAP
 Efforts to Harmonize Worldwide GAAP
Slide 15-2
15
Going International: Ways to
Export (Choices Galore)
 Independent distributor:
 Foreign commission agent.
 Foreign marketing branch.
 Foreign marketing subsidiary.
 Export trade vehicle (FSC or IC-DISC).
Slide 15-3
Ways to Export: The Concept of
Physical Presence
15
 Defined: Having an “operation” overseas.
Examples: SALES OFFICE, WAREHOUSE, FACTORY,
EMPLOYING FOREIGN CITIZENS AS SALES PERSONNEL.
 To make a determination:


Review foreign tax laws.
Review tax treaty.
 Significance: Subject to taxation
tax laws
in the
foreign country.
File a foreign
income tax return.
Slide 15-4
15
Foreign Earnings:
DOUBLE Corporate Taxation???
 Income of foreign units are taxed overseas and in
the U.S--BUT DON’T PANIC.
 U.S. tax laws allow a “foreign tax credit.”
Tax Calculation
for
Brazil
U.S.
Pretax income of foreign unit... 100,000 100,000
Applicable tax rate.......................
20%
35%
Income taxes owed..................
20,000 35,000
Less--Allowable tax credits........
(20,000)
U.S. taxes owed........................
15,000
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15
Foreign Earnings: When Are U.S.
Taxes Actually Paid?
3 possibilities exist:
 Foreign branches:
IRS
 When INCOME is earned.
 Foreign subsidiaries:
 When DIVIDENDS are paid.
 When INCOME is earned (applies
to “Subpart F” income)
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15
Reasons for Manufacturing
Overseas: The List is Long
 The lure of cheap labor
.
 Tax holidays.
Taxes
 To establish a visible presence.
 Lax environmental laws.
Dumping allowed
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15
Reasons for Manufacturing
Overseas: The List is Long
 High literacy rates & safe environments.
 A Strong work ethic.
 Loan guarantees, grants, subsidies.
 The fluctuating exchange rate problem.
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15
Risks of Investing Overseas:
All That Glitters Is Not Gold
 Expropriation--the seizure of assets by the
foreign government.
 Devaluations/weakening of the foreign
currency.
 Currency transfer restrictions Wouldn’t it
be nice to be able to bring the profits home?
 Wars and civil disorders.
 Government mandated changes in the
investment climate.
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The Diversity of Worldwide
GAAP: An Almost Unbelievable
Cornucopia
 Everything from soup to nuts.
 The United States is part of the problem-many U.S. standards are either rarely used
or not used at all overseas:
 LIFO inventory method.
 Deferred income taxes.
 Goodwill capitalization.
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Internationalize Accounting
Standards: The Grand Dream
World GAAP--so many hurdles.
All are for it--BUT few countries are
willing to change their own GAAP.
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International Accounting
Standards: World GAAP’s
Advantages
 Having a Uniform World GAAP:
 Would greatly streamline the quarterly and
year-end consolidation process for the
accountants of publicly-owned companies.
Slide 15-12
15 Efforts To Internationalize
Accounting Standards: Progress
Has Been Slow
 The International Accounting Standards Board
[“Committee” prior to 2001] (created in 1973--London
based)
 IASB Standards to date: Minimal impact-still fairly easy to comply with virtually all IASB
Standards.
Slide 15-13
Efforts To Internationalize
15
Accounting Standards: Capital
Market Forces
 The Capital Markets-A much-needed injection:
 Relatively recent trend of raising capital in
world markets has given greatly added
emphasis to the desirability of having a
world GAAP. The BIG advantage:
 Would greatly streamline the process
by eliminating the need to comply with
multiple GAAPs in offering securities.
Slide 15-14
15 Efforts To Internationalize
Accounting Standards: The FASB
Hops Aboard
 2/97: FASB issues FAS 128
“Earnings Per Share” conforming
U.S. GAAP with world GAAP.
 6/01: FASB abolished the
pooling of interests method
conforming U.S. GAAP
with world GAAP.
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End of Chapter 15
Time to Clear Things Up-Any Questions?
Slide 15-16