McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Global Business and Accounting Chapter 15.

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Global Business and Global Business and AccountingAccounting

Chapter 15

15-2

GlobalizationGlobalizationOccurs 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.

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.

15-3

GlobalizationGlobalization

Unilever Global Revenue

Europe 35%

Asia and other markets 42%The Americas 23%

15-4

GlobalizationGlobalization

Globalization typically progresses through a series of stages that include:

1. Exporting2. International licensing3. International joint ventures4. Wholly owned international subsidiaries5. Global sourcing.

1. Exporting2. International licensing3. International joint ventures4. Wholly owned international subsidiaries5. Global sourcing.

15-5

Environmental ForcesEnvironmental ForcesShaping GlobalizationShaping Globalization

GlobalizationGlobalization

Political and legalsystem

Political and legalsystem

Economicsystem

Economicsystem

CultureCulture

Technology andinfrastructure

Technology andinfrastructure

15-6

Political and Legal SystemsPolitical 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.

15-7

Economic SystemsEconomic Systems

Planned EconomyGovernment owns factors of production

Market EconomyPeople owns factors of production

15-8

CultureCulture

15-9

Technology and Technology and InfrastructureInfrastructure

Difficulty transferring knowledge and

information

Differences in educational and training levels

Differences in internal accounting

systems

Poor access to communication

equipment

Unreliable utilitiesInadequate

transportation systems

Lack of specialized equipment

15-10

Harmonization of Financial Harmonization of Financial Reporting StandardsReporting 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.

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.

15-11

Harmonization of Financial Harmonization of Financial Reporting StandardsReporting Standards

Country/Standards Auditors per

100,000

Asset Valuation Method LIFO Used

Depreciation Basis

Segment Diclosure Required

IFRS

Revaluation

allowed Used Economic

based Yes

United States 168 Historic

cost Used Economic

based Yes

United Kingdom 352

Revaluation

allowed Not Used Economic

based Yes

Germany 26 Historic

cost Not Used Tax based Limited

Brazil 1

Revaluation

allowed Not Used Economic

based No

Japan 10 Historic

cost Used Tax based Yes

Global Variation in Accounting Practices

15-12

International Financial International Financial Reporting Standards and Reporting Standards and BudgetingBudgeting

Two approaches to implementing international financial accounting standards

Adoption Convergence

Europe 2005

Canada 2011

Chili 2009

Hong Kong 2005

China 2007

Australia 2007

15-13

Foreign CurrenciesForeign Currenciesand Exchange Ratesand Exchange Rates

Country/Region Currency

Exchange Rate

(in dollars)

Exchange Rate (in foreign

currency) Britain Pound (£) $ 1.74250 0.534 Europe Euro (€) 0.89490 1.117 Japan Yen (¥) 0.00764 130.900 Mexico Peso ($) 0.10946 9.136 India Rupee (Rs) 0.02045 48.889

Foreign Exchange Rate

An exchange rate is the amount it costs topurchase one unit of currency with another currency.

¥1,000,000 × $0.00764 = $7,640¥1,000,000 × $0.00764 = $7,640

15-14

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

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.

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.

Date Description Debit CreditJan. 1 Equipment 97,000

Cash 97,000 (€100,000 x $0.97) = $97,000

U.S. company purchases €100,000 from financial institution.

Cash Purchase ― Prices Stated in a Foreign Currency

15-15

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

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.

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 Debit CreditJan. 1 Equipment 97,000

Accounts payable 97,000 (€100,000 x $0.97) = $97,000

Credit Purchase ― Prices Stated in a Foreign Currency

15-16

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

Date Description Debit CreditJan. 31 Accounts payable 1,000

Gain on rate fluctuation 1,000

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.

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.

Credit Purchase ― Prices Stated in a Foreign Currency

15-17

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

Date Description Debit CreditFeb. 15 Accounts payable 96,000

Loss on rate fluctuation 2,000 Cash 98,000

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.

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.

Credit Purchase ― Prices Stated in a Foreign Currency

15-18

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

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.

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 Description Debit CreditJan. 1 Cash 97,000

Sales 97,000 (€100,000 x $0.97) = $97,000

Cash Sale ― Prices Stated in a Foreign Currency

15-19

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

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.

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 Debit CreditJan. 1 Accounts receivable 97,000

Sales 97,000 (€100,000 x $0.97) = $97,000

Credit Sale ― Prices Stated in a Foreign Currency

15-20

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

Date Description Debit CreditJan. 31 Loss on rate fluctuation 1,000

Accounts receivable 1,000

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.

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.

15-21

Accounting for TransactionsAccounting for Transactionswith Foreign Companieswith Foreign Companies

Date Description Debit CreditFeb. 15 Cash 98,000

Gain on rate fluctuation 2,000 Accounts receivable 96,000

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.

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.

15-22

HedgingHedging

Fair Value HedgeFair Value HedgeAny gain or loss is recognized currently in Any gain or loss is recognized currently in

earningsearnings. If the hedge is on available-for-sale . If the hedge is on available-for-sale securities, any gain or loss is reported in securities, any gain or loss is reported in

other comprehensive incomeother comprehensive income on the equity on the equity section of the balance sheet.section of the balance sheet.

Fair Value HedgeFair Value HedgeAny gain or loss is recognized currently in Any gain or loss is recognized currently in

earningsearnings. If the hedge is on available-for-sale . If the hedge is on available-for-sale securities, any gain or loss is reported in securities, any gain or loss is reported in

other comprehensive incomeother comprehensive income on the equity on the equity section of the balance sheet.section of the balance sheet.

Future contracts are the right toreceive a specified quantity of

foreign currency at a future date.

15-23

Translation of Foreign Translation of Foreign Currency Financial Currency Financial StatementsStatements

Peso U.S. $1 January 2009 1 0.125$ 31 December 2009 1 0.100$ Average for the year 1 0.110$

This is the first year of This is the first year of operations for a 100% operations for a 100%

owned Mexican owned Mexican subsidiary of the U.S. subsidiary of the U.S. enterprise, Matrix, Inc.enterprise, Matrix, Inc.

This is the first year of This is the first year of operations for a 100% operations for a 100%

owned Mexican owned Mexican subsidiary of the U.S. subsidiary of the U.S. enterprise, Matrix, Inc.enterprise, Matrix, Inc.

15-24

Translation of Foreign Translation of Foreign Currency Financial Currency Financial StatementsStatements

Pesos Rate DollarsRevenues 17,000 0.110$ 1,870$ Expenses 10,200 0.110 1,122 Profit 6,800 748$

Pesos Rate DollarsRevenues 17,000 0.110$ 1,870$ Expenses 10,200 0.110 1,122 Profit 6,800 748$

Peso U.S. $1 January 2009 1 0.125$ 31 December 2009 1 0.100$ Average for the year 1 0.110$

15-25

Translation of Foreign Translation of Foreign Currency Financial Currency Financial StatementsStatements

If dividends are paid, the translation is based on If dividends are paid, the translation is based on the historical rate when the dividend is paid. The the historical rate when the dividend is paid. The

translated ending retained earnings carries translated ending retained earnings carries forward to the next accounting period.forward to the next accounting period.

If dividends are paid, the translation is based on If dividends are paid, the translation is based on the historical rate when the dividend is paid. The the historical rate when the dividend is paid. The

translated ending retained earnings carries translated ending retained earnings carries forward to the next accounting period.forward to the next accounting period.

15-26

Pesos Rate DollarsCash 2,000 0.100$ 200$ Receivables 4,000 0.100 400 Inventory 1,800 0.100 180

Equipment 16,000 0.100 1,600 Total assets 23,800 2,380$

Translation of Foreign Translation of Foreign Currency Financial Currency Financial StatementsStatements

Pesos Rate DollarsAccounts payable 2,000 0.100$ 200$ Notes payable 5,000 0.100 500 Common stock 10,000 0.125 1,250

Retained earnings 6,800 748 Translation adjustments (318) Total assets 23,800 2,380$

The translation The translation adjustment is adjustment is

reported in reported in other other

comprehensive comprehensive income in the income in the equity section equity section of the balance of the balance

sheetsheet

The translation The translation adjustment is adjustment is

reported in reported in other other

comprehensive comprehensive income in the income in the equity section equity section of the balance of the balance

sheetsheet

Zapato de Nationale, SABalance Sheet

At 31 December 2009

Equipment 1,600$ Supplies 180 Accounts receivable 400 Cash 200 Total assets 2,380$

Liabilities Accounts payable 200$ Notes payable 500 Total liabilities 700$ Shareholders' equity Ordinary share 1,250 Retained earnings 430 Total shareholders' equity 1,680 Total liabilities and shareholders' equity 2,380

Assets

Liabilities and Shareholders' Equity

15-27

Global SourcingGlobal 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.

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.

€€ ¥¥££Customs duties

Import fees

Multicountry tax laws

Taxtreaties

15-28

End of Chapter 15End of Chapter 15