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HaNoi National University

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CHAPTER 1:
INTRODUCTION TO INTERNATIONAL
ACCOUNTIN
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 LEARNING OBJECTIVES
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1. Discuss the nature and scope of international

accounting.
2. Describe accounting issues created by international
trade (import and export transactions)
3. Explain reasons for, and accounting issues associated
with, foreign direct investment (FDI).
4. Describe the practice of cross-listing on foreign stock
exchanges.
5. Explain the notion of global accounting standards.
6. Examine the importance of international trade, FDI, and
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multinational corporations (MNCs) in the global economy

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 1. WHAT IS INTERNATIONAL ACCOUNTING?
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• The word “Accounting” encompasses various functional areas of financial

accounting, managerial accounting, auditing, taxation and accounting
information systems.
• The word “International” can be defined at three different levels
– International accounting: Study of the standards, guidelines, and
rules of accounting, auditing, and taxation existing within each
country and comparison across countries
– Supranational accounting: Standards, guidelines, and rules issued
by supranational organizations, eg. International federation of
accountants (IFA), Organization for economic cooperation and
development (OECD), United nations (UN).
– Company level: standards, guidelines, and practices followed by
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company in international business activities and foreign investments.

Eg, standards for foreign currency transactions, techniques for
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 2. EVOLUTION OF A MULTINATIONAL CORPORATION
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Sale to foreign customer

• Most companies’ first encounter with international business
occurs as sales to foreign customers.
• Often, the sale is made on credit and if it is denominated in foreign
currency  This gives rise to foreign exchange risk due to the
change in exchange rate between the invoiced date and payment
date.
• Example: On February 1, 2011, Joe Inc., a U.S. company, makes a
sale on account to John Ltd, a Mexican customer, for 1,000,000 Pesos
when the exchange rate is 10 pesos per USD.
On March 2, 2011, the exchange rate for pesos is 11 pesos/USD. Joe
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Inc. has receipt 1,000,000 pesos in full.

Required: Prepare journal entries for the above transactions at Joe Inc
company. INTERNATIONALSCHO
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 2. EVOLUTION OF A MULTINATIONAL CORPORATION
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Hedging

Joe can hedge (i.e., protect itself) against a loss from an exchange rate
fluctuation. Hedging can be accomplished by using derivative financial
instrument:

- Foreign currency option – the right (but not the obligation) to exchange
foreign currency at a specific exchange rate for a specified period of time.
Ex: Joe purchased a put option for US$50 and able to sell the 1,000,000
pesos for a total of 95,000USD after 1 months.

- Forward contract – this is an obligation to exchange foreign currency at

a date in the future, which is typically 30, 60 or 90 days.
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Ex: Joe entered into a forward contract to sell the 1,000,000 pesos for a
total of 98,000USD after 30 days.
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 2. EVOLUTION OF A MULTINATIONAL CORPORATION
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Foreign Direct Investment (FDI)

• Occurs when a company invests in a business operation in a foreign
country.
• Two types of FDI:
− Greenfield investment – the establishment of a new operation in
the foreign country.
− Acquisition – investment in an existing operation in the foreign
country.
• Reasons for FDI
− Increase Sales and Profits
− Enter Rapidly Growing or Emerging Markets
− Reduce Cost
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− Protect Domestic Markets

− Protect Foreign Markets
− Acquire Technological and Managerial Know-How
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 2. EVOLUTION OF A MULTINATIONAL CORPORATION
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Financial reporting for foreign operations:

• At the end of the accounting period, the parent company is often
required to prepare consolidated financial statements. To consolidate the
results of a foreign subsidiary, two procedures must be completed.
• The need to convert from local country’s GAAP to home country’s
GAAP since accounting records are usually prepared using local
GAAP.
Ex: according to local GAAP, cash flow information is not provided, many
liabilities are kept off-balance-sheet, etc.
• The need to translate from local currency to U.S. dollars since
accounting records are usually prepared using local currency.
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Ex: an US company has a subsidiary in Vietnam.

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 2. INTERNATIONAL TRANSACTIONS, FDI AND RELATED
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ACCOUNTING ISSUES

International Income Tax

• Double taxation
– Foreign country’s income taxes: A foreign subsidiary should pay
income tax to the local government.
– Home country’s income taxes: The parent also has to pay income
tax to home country’s government on its foreign based income.
• Tax treaties between two countries can provide relief from double
taxation
• Objectives
– Legally minimize taxes in foreign countries and home country
– Maximize after-tax cash flows
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 2. INTERNATIONAL TRANSACTIONS, FDI AND RELATED
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ACCOUNTING ISSUES

International transfer pricing

• Objective: minimize the amount of worldwide tax paid by shifting profits
from countries with high-tax rates to countries with low tax rates.
• Meaning: setting prices on goods and services exchanged within the
same firm or same group.
• Eg: A parent in U.S sold materials to a subsidiary in Vietnam. The
income tax rate in Vietnam is higher than in U.S. How should the
US company set the selling price?
• To ensure companies pay their fair share of local taxes, most
countries have laws that regulate international transfer pricing
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 2. INTERNATIONAL TRANSACTIONS, FDI AND RELATED
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ACCOUNTING ISSUES

International Auditing

Both internal and external auditors encounter differences that arise

between auditing in an international vs. domestic context.
These include:
• Language and cultural differences
• Different accounting standards (GAAP) and auditing standards (GAAS)
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 2. INTERNATIONAL TRANSACTIONS, FDI AND RELATED
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ACCOUNTING ISSUES

Cross-Listing on Foreign stock exchanges

• MNCs frequently raise capital outside their home country. When a
company offers its shares on an exchange outside of its home country,
this is referred to as Cross-Listing.
Global Accounting Standards
• There is an international movement towards adopting a set of
global accounting standards. These standards are known as
“International Financial Reporting Standards” or “IFRS”.
• More than 100 countries applied IFRS
• The advantage of the adoption of global accounting standards is
the elimination of the need to convert from local GAAP when
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preparing consolidated financial statements.

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 3. THE GLOBAL ECONOMY
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Several indicators demonstrate the extent of business

globalization:
• International trade* – In 2024, global merchandise trade is projected to reach
approximately $33 trillion
• China, USA, and Germany are 3 largest exporters in that order.
• In 2024, Vietnam's total merchandise exports are projected to reach
approximately $405.53 billion (significant industries: Electronics and Phones,
garment and textiles, agriculture products)
• Foreign Direct Investment** – worldwide FDI inflows increased from
$1.4 trillion in 2024.
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 3. THE GLOBAL ECONOMY
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Several indicators demonstrate the extent of business

globalization:

• Multinational enterprises (MNEs) – Companies that have

headquarters in one country and operate in one or more other
countries. MNEs are major drivers of FDI.
• Currently, MNEs account for approximately a third of the global
economic output (OECD, 2018). Top 100 MNEs account for more
than a third of the business-funded R&D worldwide (United
nations, World investment report 2019, 2019)
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 3. THE GLOBAL ECONOMY
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Several indicators demonstrate the extent of

business globalization:

• International capital markets – Companies from outside the

U.S., including those from Europe, Asia, and Latin America,
frequently list on the NYSE. For example, companies like
Alibaba (China), Nestlé (Switzerland), and Toyota (Japan)…
have listed in NYSE.
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 Homework Questions
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1. What accounting issues arise for a company as a result of

engaging in international trade (imports and exports)?
2. What financial reporting issues arise as a result of making a
foreign direct investment?
3. What problems arise for a company when become globalization?
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