Exporting and Trading info

SUMMARY ■ The MNE must cope with differing rates of inflation, changes in exchange rates, currency controls, customs, levels of sophistication, and local reporting requirements in performing its finance and accounting functions. ■ Some of the major factors that influence the development of accounting objectives, standards, and practices are the nature of the enterprise, the enterprise's users of information, governmental users and regulators, other external users (such as creditors), local environmental characteristics, international influences, academic influences, and the accounting profession. ■ There are important differences in worldwide accounting standards and practices. However, groups such as the EC and the International Accounting Standards Committee (IASC) are attempting to harmonize accounting practices and upgrade the accounting profession. ■ In translating transactions denominated in foreign currency, all accounts are recorded initially at the exchange rate in ef...

LOOKING TO THE FUTURE   Although accounting standards differ significantly from country to country, the differences are beginning to narrow. As capital markets become increasingly integrated and as firms increasingly move to list their stock on different national stock exchanges, accounting differences will narrow. The stock exchanges will become an increasingly more important force in harmonizing accounting standards. It is hard to predict what will happen in taxation, since tax policy is at the whim of government. Certainly tax differences among countries in the EC will narrow in the years to come. Harmonization should take place in the determination of taxable income and the tax rates themselves. MNEs will need to be more creative in their tax payments worldwide as they seek to operate in such a way as to minimize their tax liabilities.

TAXATION OF FOREIGN-SOURCE INCOME When a domestic firm makes the decision to sell its products internationally, it can do so directly through the export of goods and services (including licensing agreements, management contracts, and so on), through foreign branch operations (a legal extension of the parent), and through foreign corporations in which the domestic firm holds an equity interest that could vary from a small percentage to complete ownership. Export of Goods and Services Many enterprises, such as public accounting firms, advertising agencies, banks, and management consulting firms, deal in services rather than products. Many manufacturing industries also find it easier and more profitable to sell expertise, such as patents or management services, rather than goods. Generally, payment is received in the form of royalties and fees, and this payment usually is taxed by the foreign government. Since the sale of services is made by the parent, the sale also must be included ...

TAXATION Tax planning is crucial for any business, since it can have a profound effect on profitability and cash flow. This is especially true in international business,  ^s complex as domestic taxation seems, it is relatively simple compared to the intricacies of international taxation. The international tax accountant must be familiar not only with the home country's tax policy relating to foreign operations, but also with the laws of each country in which the client operates. Taxation has a strong impact on the choice of: (1) location in the initial investment decision; (2) legal form of the new enterprise, such as branch or subsidiary; (3) method of finance, such as internal versus external sourcing and debt versus equity; and (4) method of arranging prices between related entities.5 This section of the chapter examines taxation for the firm involved in international operations. Emphasis will be placed on U.S. tax policy because of the nature and extent of U.S. foreign dire...

TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS Even though MNEs receive reports originally developed in a variety of different currencies, they eventually must end up with one set of financial statements in U.S. dollars in order to help management and investors get an aggregate view of worldwide activities in a common currency. The process of restating foreign currency financial statements into U.S. dollars is known as translation. The combination of all of these translated financial statements into one is known as consolidation. Translation in the United States is a two-step process: The first step involves recasting the foreign currency financial statements into statements Correct Procedures for U.S. Firms The procedures that U.S. firms must follow to account for foreign currency transactions are found in Financial Accounting Standards Board (FASB) Statement No. 52, "Foreign Currency Translation," which was adopted in December 1981. The FASB is the private-sector...

TRANSACTIONS IN FOREIGN CURRENCY One of the major problems of accounting for international business is the operating in different currencies. In addition to eliminating or minimi; foreign-exchange risk, a firm must concern itself with the proper recorc and subsequent accounting of assets, liabilities, revenues, and expenses i are measured or denominated in a foreign currency. These transactions result from the purchase and sale of goods and services as well as the born ing and lending of foreign currency. Recording of Transactions Any time a U.S. importer is required to pay for equipment or merchandis a foreign currency, it must trade U.S. dollars for that currency to pay supplier. Assume that Sundance Ski Lodge buys skis from a French supp for FF 28,000 when the exchange rate is $0.1900/FF. Sundance would rec the following on its books: As long as Sundance pays immediately, there is no problem. But what happens if the exporter extends 30 days' credit to Sundance? The original...

HARMONIZATION OF DIFFERENCES Because of the different factors that influence the establishment of accounting standards and the practice of accounting in each country, there are significant differences in the way accounting is practiced. In the opening case, we discussed the disclosure of information by Daimler-Benz, a German corporation. Germany relies on the law for the basis of its accounting standards. When German auditors audit the financial statements of German firms, they try to make sure that the firms use accounting practices that are in compliance with the law. In fact, the audit report of Daimler-Benz states the following: The annual accounts, which have been audited in accordance with professional standards, comply with the legal provisions. With due regard to the generally accepted accounting principles, the annual accounts give a true and fair view of the assets, liabilities, financial position and profit and loss of Daimler-Benz Aktiengesellschaft. The reference to th...

FACTORS INFLUENCING THE DEVELOPMENT OF ACCOUNTING AROUND THE WORLD One of the problems that Daimler-Benz faces is that accounting systems var    around the world. This means that financial statements in France, for exam  financial statements in the United States. Som( foreign countries. observers argue that this is a minor matter, based in form rather than sub stance. In fact, however, the substance is also different, such as in Peru, wher< consolidation of related companies is not allowed; in Sweden, where signif icant inventory write-downs are allowed; and in France and Germany, when tax accounting and book accounting are essentially the same. These varia tions put the MNE in a difficult position because it needs to prepare an< understand reports generated according to the local accounting standards a well as prepare financial statements consistent with generally accepted ac counting principles (GAAP) in the home country in order to general consolidated financ...

MULTINATIONAL ACCOUNTING AND TAX FUNCTIONS In 1989 Daimler-Benz was the second-largest corporation in Germany in terms of market value, the forty-second-largest corporation in the world in terms of market value, and the fifth most profitable firm in the world with profits of $3.8 billion. Its primary product divisions are Mercedes-Benz, AEG (which focuses on automation systems, office and communications systems, electrotechnical systems and components, electrical consumer products, microelectronics, and transportation systems), and Deutsche Aerospace. In 1989 Daimler-Benz derived 61 percent of its sales from abroad. As illustrated in Map 19.1, Daimler-Benz lists its principal subsidiaries and affiliated companies in the annual report and provides several pieces of financial information for its major subsidiaries around the world. Daimler-Benz stock has been listed on all German stock exchanges and the Swiss stock exchanges in Basel, Geneva, and Zurich. In 1990 Daimler-Benz stock was...