International
Accounting and
Financial
Reporting Issues
© Copyright Doug Hillman 2000
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Issues in Accounting for
International Operations
Accounting standards differ around
world
 Exchange rates between countries
change frequently

© Copyright Doug Hillman 2000
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Differing Accounting
Standards
Countries like US have private standard
setting bodies
 Countries with strongly socialized
economies like Germany, government
agencies sets standards
 International Accounting Standards
Committee’s goal to reduce differences
in accounting methods

© Copyright Doug Hillman 2000
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Financial Reporting Issues &
International Transactions
Accounting for foreign currency
exchange transactions
 Translation of foreign subsidiary
financial statements from foreign
currency to reporting currency

© Copyright Doug Hillman 2000
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Foreign Currency Exchange
Transactions
When sales transaction denominated in
a foreign currency, cash received will be
the foreign currency
 Change in exchange rates between date
of sale and date of collection will cause
foreign currency exchange gain or loss

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Foreign Currency Exchange
Transactions
Date of sale
› Convert foreign currency to dollar
equivalent
› Record as receivable
 Date of collection
› Convert foreign currency to dollar
equivalent
› Record foreign currency exchange
gain or loss for difference

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Translation of Foreign
Currency Statements
Functional currency is currency of the
primary economic environment in which
the foreign entity generates revenues
and expends cash
 Different translation methods depending
on whether functional currency is
› Local currency of subsidiary
› Reporting currency of parent

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Translation of Foreign
Currency Statements

When functional currency is local
currency of subsidiary
› Follow current rate method of
translation
› Use current exchange rate for assets
and liabilities
› Use average for period for revenues
and expenses
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Translation of Foreign
Currency Statements

When functional currency is reporting
currency of parent
› Use current/historical method
› Translate monetary assets and
liabilities at current rate
› Translate other assets, liabilities, and
owners’ equity at historical reates
› Translate revenue and expense at
weighted average rates for period
© Copyright Doug Hillman 2000
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Translation of Foreign
Currency Statements
Any change in currency exchange gives
rise to situation where difference
between assets and liabilities does not
equal owners’ equity
 To reconcile difference, parent reports
foreign currency translation adjustment
 Reported as part of owners’ equity

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Hedging Strategies
Limit or avoid losses from changes in
exchange rates
 Company may enter into transactions of
equal value
 Enter into hedging contracts
› Contract to buy the foreign currency in
the future at exchange rates on date
of initial transaction

© Copyright Doug Hillman 2000
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Sources of Generally Accepted
Accounting Principles
American Institute of Certified Public
Accountants
› 1937 through 1973
› Accounting Research Bulletins
› Opinions of the Accounting Principles
Board
 Financial Accounting Standards Board
› Statements of Financial Accounting
Standards

© Copyright Doug Hillman 2000
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Basic GAAP
Entity concept
 Going concern
 Consistency
 Conservatism
 Periodicity
 Objective evidence
 Materiality
 Full disclosure

© Copyright Doug Hillman 2000
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Basic GAAP
Historical cost
 Stable dollar
 Revenue realization
› Point of sale
› Collection method
› Installment method
› Percentage of completion method
 Matching expenses and revenues

© Copyright Doug Hillman 2000
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Statements of Financial
Accounting Concept
Attempt to develop a conceptual
framework within which new accounting
standards are developed
 Important topics
› Objectives of financial reporting
› Qualitative aspects of accounting
information
› Elements of financial statements

© Copyright Doug Hillman 2000
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Objectives of Financial
Reporting
Provide information useful in making
investment and credit decisions
 Provide information useful in judging
amounts, timing, and certainty of future
cash flows
 Provide information about resources of
the business, claims on the resources,
and changes in the resources during the
period

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Qualitative Characteristics

Overall constraints
› Benefits > costs
› Materiality
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Qualitative Characteristics

Decision usefulness
› Relevance
–Predictive value, feedback value,
timeliness
› Reliability
–Verifiability, neutrality,
representational faithfulness
© Copyright Doug Hillman 2000
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Impact of Inflation on
Accounting Information
Historical cost assumes the value of the
dollar does not change significantly
 Balance sheet
› Most assets do not reflect current
value
 Income statement
› Some expenses may reflect historical
cost versus current cost

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