Global Business and Accounting
Chapter 15
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Globalization
Occurs as managers become aware of and
engage in cross-border trade and
operations. A high 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.
15-2
Globalization
Unilever Global Revenue
Europe 35%
Asia and other
markets 42%
The Americas
23%
15-3
Globalization
Globalization typically progresses through
a series of stages that include:
1.
2.
3.
4.
5.
Exporting
International licensing
International joint ventures
Wholly owned international subsidiaries
Global sourcing.
15-4
Environmental Forces
Shaping Globalization
Political and legal
system
Culture
Globalization
Economic
system
Technology and
infrastructure
15-5
Political and Legal Systems
•
•
•
•
•
•
•
•
•
Threat of government control or seizure of assets.
Differing taxes, tariffs and licensing fees.
Restrictions on foreign ownership percentage.
Restrictions on currency flows.
Trade agreements specifying raw material sources
and labor content.
Duty-free foreign trade zones.
Tax incentives encouraging or discouraging share
ownership.
Policies affecting individual savings.
Policies impacting educational level of citizens.
15-6
Economic Systems
Planned Economy
Government owns factors of production
Market Economy
People owns factors of production
15-7
Culture
15-8
Technology and Infrastructure
Difficulty transferring
knowledge and
information
Differences in
educational and
training levels
Inadequate
transportation
systems
Unreliable utilities
Differences in
internal accounting
systems
Poor access to
communication
equipment
Lack of specialized
equipment
15-9
Harmonization of Financial
Reporting Standards
The International Accounting Standards
Board (IASB) has as one of its stated goals
the harmonization of accounting standards.
Harmonization is used to describe the
standardization of accounting methods and
principles used in different countries
throughout the world.
15-10
Harmonization of Financial
Reporting Standards
Global Variation in Accounting Practices
Country/Standards
Auditors per
100,000
IFRS
United States
168
United Kingdom
352
Germany
26
Brazil
1
Japan
10
Asset
Valuation
Method
Revaluation
allowed
Historic
cost
Revaluation
allowed
Historic
cost
Revaluation
allowed
Historic
cost
LIFO Used
Depreciation
Basis
Segment
Diclosure
Required
Not Used
Economic
based
Economic
based
Economic
based
Not Used
Tax based
Limited
Not Used
Economic
based
No
Used
Tax based
Yes
Used
Used
Yes
Yes
Yes
15-11
International Financial Reporting
Standards and Budgeting
Two approaches to implementing
international financial accounting standards
Adoption
Convergence
Europe 2005
Hong Kong
2005
Chili 2009
Australia 2007
Canada 2011
China 2007
15-12
Foreign Currencies
and Exchange Rates
An exchange rate is the amount it costs to
purchase one unit of currency with another currency.
Foreign Exchange Rate
Country/Region
Britain
Europe
Japan
Mexico
India
Currency
Pound (£)
Euro (€)
Yen (¥)
Peso ($)
Rupee (Rs)
Exchange
Rate
(in dollars)
$
1.74250
0.89490
0.00764
0.10946
0.02045
¥1,000,000 × $0.00764 = $7,640
Exchange
Rate (in
foreign
currency)
0.534
1.117
130.900
9.136
48.889
15-13
Accounting for Transactions
with Foreign Companies
Cash Purchase ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company purchases
equipment from an Italian company for €100,000. The
amount is payable in full on that date. On 1 January
2009, the exchange rate is $0.97 per Euro.
U.S. company purchases €100,000 from financial institution.
Date
Jan. 1
Description
Equipment
Cash
(€100,000 x $0.97) = $97,000
Debit
97,000
Credit
97,000
15-14
Accounting for Transactions
with Foreign Companies
Credit Purchase ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company purchases
equipment from an Italian company for €100,000. The
amount is payable in full on 15 February 2009. On 1
January 2009, the exchange rate is $0.97 per Euro. At
31/1/09 the spot exchange rate is €1 = $0.96. On
15/2/09, the exchange rate is €1 = $0.98.
Date Description
Jan. 1 Equipment
Accounts payable
(€100,000 x $0.97) = $97,000
Debit
97,000
Credit
97,000
15-15
Accounting for Transactions
with Foreign Companies
Credit Purchase ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company purchases
equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2009. On 1
January 2009, the exchange rate is $0.97 per Euro. At
31/1/09 the spot exchange rate is €1 = $0.96. On
15/2/09, the exchange rate is €1 = $0.98.
Date
Description
Jan. 31 Accounts payable
Gain on rate fluctuation
Debit
1,000
Credit
1,000
15-16
Accounting for Transactions
with Foreign Companies
Credit Purchase ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company purchases
equipment from an Italian company for €100,000. The
amount is payable in full on 15 February 2009. On 1
January 2009, the exchange rate is $0.97 per Euro. At
31/1/09 the spot exchange rate is €1 = $0.96. On
15/2/09, the exchange rate is €1 = $0.98.
Date
Description
Feb. 15 Accounts payable
Loss on rate fluctuation
Cash
Debit
96,000
2,000
Credit
98,000
15-17
Accounting for Transactions
with Foreign Companies
Cash Sale ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company sells equipment
to an Italian company for €100,000. The amount is
collected in full on that date. On 1 January 2009, the
exchange rate is $0.97 per Euro.
Date
Jan. 1
Description
Cash
Sales
(€100,000 x $0.97) = $97,000
Debit
97,000
Credit
97,000
15-18
Accounting for Transactions
with Foreign Companies
Credit Sale ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company sells equipment
to an Italian company for €100,000. The full amount
will be collected on 15 February 2009. On 1 January
2009, the exchange rate is $0.97 per Euro. At 31/1/09
the spot exchange rate is €1 = $0.96. On 15/2/09, the
exchange rate is €1 = $0.98.
Date Description
Jan. 1 Accounts receivable
Sales
(€100,000 x $0.97) = $97,000
Debit
97,000
Credit
97,000
15-19
Accounting for Transactions
with Foreign Companies
Credit Sale ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company sells equipment
to an Italian company for €100,000. The full amount
will be collected on 15 February 2009. On 1 January
2009, the exchange rate is $0.97 per Euro. At 31/1/09
the spot exchange rate is €1 = $0.96. On 15/2/09, the
exchange rate is €1 = $0.98.
Date
Description
Jan. 31 Loss on rate fluctuation
Accounts receivable
Debit
1,000
Credit
1,000
15-20
Accounting for Transactions
with Foreign Companies
Credit Sale ― Prices Stated in a Foreign Currency
On 1 January 2009, a U.S. company sells equipment
to an Italian company for €100,000. The full amount
will be collected on 15 February 2009. On 1 January
2009, the exchange rate is $0.97 per Euro. At 31/1/09
the spot exchange rate is €1 = $0.96. On 15/2/09, the
exchange rate is €1 = $0.98.
Date
Description
Feb. 15 Cash
Gain on rate fluctuation
Accounts receivable
Debit
98,000
2,000
Credit
96,000
15-21
Hedging
Future contracts are the right to
receive a specified quantity of
foreign currency at a future date.
Fair Value Hedge
Any gain or loss is recognized currently in
earnings. If the hedge is on available-for-sale
securities, any gain or loss is reported in
other comprehensive income on the equity
section of the balance sheet.
15-22
Translation of Foreign Currency
Financial Statements
Zapato de Nationale, SA
Income Statement
For the Year Ended 31 December 2009
(000 Pesos)
Revenues
Service revenue
17,000
Expenses
Rent expense
9,000
Insurance expense
1,000
Supplies expense
200
Total expenses
10,200
Profit
6,800
1 January 2009
31 December 2009
Average for the year
Peso
1
1
1
This is the first year of
operations for a 100%
owned Mexican
subsidiary of the U.S.
enterprise, Matrix, Inc.
Zapato de Nationale, SA
Retained Earnings Statement
For the Year Ended 31 December 2009
(000 Pesos)
Retained earnings, 1 January
U.S. $
Add: Profit
6,800
$ 0.125
6,800
$ 0.100
Less: Dividends
$ 0.110
Retained earnings, 31 December
6,800
15-23
Translation of Foreign Currency
Financial Statements
Zapato de Nationale, SA
Income Statement
For the Year Ended 31 December 2009
(000 Pesos)
Revenues
Service revenue
17,000
Expenses
Rent expense
9,000
Insurance expense
1,000
Supplies expense
200
Total expenses
10,200
Profit
6,800
Revenues
Expenses
Profit
Pesos
17,000
10,200
6,800
1 January 2009
31 December 2009
Average for the year
Rate
$ 0.110
0.110
Peso
1
1
1
U.S. $
$ 0.125
$ 0.100
$ 0.110
Dollars
$ 1,870
1,122
$
748
15-24
Translation of Foreign Currency
Financial Statements
Zapato de Nationale, SA
Retained Earnings Statement
For the Year Ended 31 December 2009
Retained earnings, 1 January
$ Add: Profit
748
748
Less: Dividends
Retained earnings, 31 December $ 748
If dividends are paid, the translation is based on
the historical rate when the dividend is paid. The
translated ending retained earnings carries
forward to the next accounting period.
15-25
Translation of Foreign Currency
Financial Statements
Zapato de Nationale, SA
Balance Sheet
Pesos
Rate
Dollars
At 2,000
31 December
2009 $
Cash
$ 0.100
200
Receivables
4,000 Assets0.100
400
Inventory
1,800
0.100
180$
Equipment
Equipment
16,000
0.100
1,600
Supplies
Total assets
$ 2,380
Accounts
receivable23,800
Cash
Total assets
$
1,600
180
400
200
2,380
Shareholders' equity
Ordinary share
1,250
Retained earnings
430
Total shareholders' equity
Total liabilities and shareholders' equity
1,680
2,380
Pesos
Rate
Dollars
Accounts payable
2,000
$ 0.100
$
200
Liabilities and Shareholders' Equity
Notes payable
5,000
0.100
500
Liabilities
Common stock
10,000
0.125
1,250
Accounts
payable
$
200
Retained earnings
6,800
748
Notes
payable
500
Translation adjustments
(318)
Totalliabilities
assets
23,800
$$ 2,380
Total
700
The translation
adjustment is
reported in
other
comprehensive
income in the
equity section
of the balance
sheet
15-26
Global Sourcing
Differences in exchange rates in many different
countries can create significant complexities for
firms practicing global sourcing.
Many companies underestimate the cost of
globalizing their business operations because they
are not familiar with the environmental
characteristics previously discussed.
Tax
treaties
Customs
duties
Multicountry
tax laws
Import
fees
£ € ¥
15-27
End of Chapter 15
15-28