Page 256 - DMGT545_INTERNATIONAL_BUSINESS

Unit 13: Basics of International Accounting and Financial Management

13.2 Basics of international accounting notes

International Accounting can be described at three different levels:

l z The influence on accounting by international political groups such as the OECD, UN, etc.
l z The accounting practices of companies in response to their own international business
activities.

l z The differences in accounting standards and practices between countries.
13.2.1 international transactions, fDi and related accounting issues

Sale to foreign customer
l z Most companies’ first encounter with international business occurs as sales to foreign
customers.

l z Often, the sale is made on credit and it is agreed that the foreign customer will pay in its
own currency (e.g., Mexican pesos).
l z This gives rise to foreign exchange risk as the value of the foreign currency is likely to
change in relation to the company’s home country currency (e.g., US dollars).

Example: Suppose that on February 1, 2006, Joe Inc., a U.S. company, makes a sale and
ships goods to Jose, SA, a Mexican customer, for $100,000 (U.S.). However, it is agreed that Jose
will pay in pesos on March 2, 2006. The exchange (spot) rate as of February 1, 2006 is 10.00 pesos
per U.S. dollar. How many pesos does Jose agree to pay?
Solution: sale to foreign customer
Even though Jose SA agrees to pay 1,000,000 Pesos ($100,000 x 10.00 pesos/U.S. $), Joe, Inc.
records the sale (in U.S. dollars) on February 1, 2006 as follows:
Dr. Accounts receivable (+) 100,000
Cr. Sales revenue (+) 100,000

sale to foreign customer
Suppose that on March 2, 2006, the spot rate for pesos is 11 pesos/U.S. $). Joe Inc. will receive
1,000,000 pesos, which are now worth $90,909. Joe makes the following journal entry:
Dr. Cash (+) 90,909

Dr. Loss on foreign exchange (+) 9,091
Cr. Accounts receivable 100,000

13.2.2 Hedging

Joe can hedge (i.e., protect itself) against a loss from an exchange rate fluctuation. Hedging can be
accomplished by various means, including:

Foreign currency option: The right (but not the obligation) to purchase foreign currency at a
specific exchange rate for a specified period of time.
Forward contract: This is an obligation to exchange foreign currency at a date in the future,
typically 30, 60 or 90 days.
Foreign Direct Investment (FDI): Occurs when a company invests in a business operation in a
foreign country. This represents an alternative to importing to customers and/or exporting from

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