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GLOBAL BUSINESS AND ACCOUNTING

Chapter

15

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The process of managers assessing the impact of international activities on the future of their company.

The process of managers assessing the impact of international activities on the future of their company.

Globalization typically progresses through an outward growth path.

Globalization typically progresses through an outward growth path.

GlobalizationGlobalization

ExportingGlobal

SourcingLicensing &

Joint VentureWholly Owned Subsidiaries

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EconomicEconomic

GlobalizationGlobalization

TechnologicalTechnological

Environmental Forces Shaping Globalization

Environmental Forces Shaping Globalization

CulturalCulturalPolitical/LegalPolitical/Legal

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Environmental Forces Shaping Globalization

Environmental Forces Shaping Globalization

EconomicEconomic

GlobalizationGlobalization

TechnologicalTechnological

Political/LegalPolitical/Legal

•Businesses

•Transfer Risk

•Control Risk

•Reporting

•Individuals

•Tax Laws

•Policies

•Businesses

•Transfer Risk

•Control Risk

•Reporting

•Individuals

•Tax Laws

•Policies

CulturalCultural

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GlobalizationGlobalization

EconomicEconomic

Economic SystemObtaining Capital

Industrial Organization

Exchange Rate Fluctuation

Economic SystemObtaining Capital

Industrial Organization

Exchange Rate Fluctuation

TechnologicalTechnological

Environmental Forces Shaping Globalization

Environmental Forces Shaping Globalization

Political/LegalPolitical/Legal CulturalCultural

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Environmental Forces Shaping Globalization

Environmental Forces Shaping Globalization

EconomicEconomic

GlobalizationGlobalization

TechnologicalTechnological

CulturalCultural

Individualism vs. Collectivism

Uncertainty Avoidance

Short vs. Long Horizon

Power Distance

Individualism vs. Collectivism

Uncertainty Avoidance

Short vs. Long Horizon

Power Distance

Political/LegalPolitical/Legal

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GlobalizationGlobalization

EconomicEconomic TechnologicalTechnological

Education LevelInfrastructure

Knowledge Transfer

Education LevelInfrastructure

Knowledge Transfer

Environmental Forces Shaping Globalization

Environmental Forces Shaping Globalization

Political/LegalPolitical/Legal CulturalCultural

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Foreign Currencies and Exchange Rates

Foreign Currencies and Exchange Rates

Each country uses its own currency for internal economic transactions.

To make transactions in another country, units of that country’s currency must be acquired.

The cost of those currencies is called the exchange rate.

Each country uses its own currency for internal economic transactions.

To make transactions in another country, units of that country’s currency must be acquired.

The cost of those currencies is called the exchange rate.

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Exchange RatesExchange Rates

Exchange rates fluctuate daily.

Daily exchange rates are published in the financial press, such as the Wall Street Journal.

The process of restating a foreign currency amount into a domestic currency amount is called “translation”.

Exchange rates fluctuate daily.

Daily exchange rates are published in the financial press, such as the Wall Street Journal.

The process of restating a foreign currency amount into a domestic currency amount is called “translation”.

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Exchange RatesExchange Rates

When the US $ price of a foreign currency

unit rises, we say that the US $ is

“weaker”.

When the US $ price of a foreign currency

unit rises, we say that the US $ is

“weaker”.

When the US $ price of a foreign currency unit falls, we say that

the US $ is “stronger”.

When the US $ price of a foreign currency unit falls, we say that

the US $ is “stronger”.

I noticed that the $ is stronger against the Yen

today.

Yes. Yesterday, Yen cost $0.0106, but

today, Yen only cost $0.0100!

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When a transaction is denominated in a foreign

currency . . . And the transaction occurs on

one date (for example a credit sale) . . .

. . . but the cash flow is at a later date . . .

. . . fluctuating exchange rates can result in exchange rate

gains or losses.

When a transaction is denominated in a foreign

currency . . . And the transaction occurs on

one date (for example a credit sale) . . .

. . . but the cash flow is at a later date . . .

. . . fluctuating exchange rates can result in exchange rate

gains or losses.

?12/10/02 1 DM = $.55

US

1/9/03 1 DM = $.53 US

Accounting for Transactions with Foreign Companies

Accounting for Transactions with Foreign Companies

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Exchange Rate IssuesExample

Exchange Rate IssuesExample

On 9/10/02, BobCo (a US firm) sells inventory to Knight Corp. (a UK firm) on credit. Knight will pay BobCo

10,000 British pounds in 3 months.The current exchange rate is $1 = .6093 £.

On 9/10/02, what is the expected US $ value of the 10,000 £ that BobCo expects to collect on 12/10/02?

On 9/10/02, BobCo (a US firm) sells inventory to Knight Corp. (a UK firm) on credit. Knight will pay BobCo

10,000 British pounds in 3 months.The current exchange rate is $1 = .6093 £.

On 9/10/02, what is the expected US $ value of the 10,000 £ that BobCo expects to collect on 12/10/02?

On September 10, BobCo would expect to be able to convert the 10,000 £ into $16,412.27 on December 10,

2002 based on the current exchange rate.

10,000£ ÷ .6093 = $16,412.28

On September 10, BobCo would expect to be able to convert the 10,000 £ into $16,412.27 on December 10,

2002 based on the current exchange rate.

10,000£ ÷ .6093 = $16,412.28

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On December 10, 2002, BobCo would actually collect $16,353.23, an exchange loss of of $59.05 since

September 10!

10,000£ ÷ .6115 = $16,353.23

On December 10, 2002, BobCo would actually collect $16,353.23, an exchange loss of of $59.05 since

September 10!

10,000£ ÷ .6115 = $16,353.23

Exchange Rate IssuesExample

Exchange Rate IssuesExample

By 12/10/02, the foreign exchange rate haschanged to $1 = .6115 £.

After receiving the British £ from Knight, and exchanging them into US $, how much will BobCo

have actually received?

By 12/10/02, the foreign exchange rate haschanged to $1 = .6115 £.

After receiving the British £ from Knight, and exchanging them into US $, how much will BobCo

have actually received?

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Adjustment of Foreign Currency Transaction at the Balance Sheet Date

Adjustment of Foreign Currency Transaction at the Balance Sheet Date

Occasionally, a transaction occurs in one fiscal period, but

cash is not received or paid until the next fiscal

period.

Occasionally, a transaction occurs in one fiscal period, but

cash is not received or paid until the next fiscal

period.At the balance sheet

date, any outstanding foreign currency

receivables or payables must be “remeasured”

using the spot rate available on the balance

sheet date.

At the balance sheet date, any outstanding

foreign currency receivables or payables must be “remeasured”

using the spot rate available on the balance

sheet date.

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Adjustment of Foreign Currency Transaction at the Balance Sheet Date

Adjustment of Foreign Currency Transaction at the Balance Sheet Date

On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000

french francs on credit. Payment is due in 90 days.The current exchange rate is $0.1575 per FF.Prepare Balloon Co.’s 12/1/02 journal entry.

On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000

french francs on credit. Payment is due in 90 days.The current exchange rate is $0.1575 per FF.Prepare Balloon Co.’s 12/1/02 journal entry.

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Adjustment of Foreign Currency Transaction at the Balance Sheet Date

Adjustment of Foreign Currency Transaction at the Balance Sheet Date

On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000

french francs on credit. Payment is due in 90 days.The current exchange rate is $0.1575 per FF.Prepare Balloon Co.’s 12/1/02 journal entry.

On 12/1/02, Balloon Co., a US balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000

french francs on credit. Payment is due in 90 days.The current exchange rate is $0.1575 per FF.Prepare Balloon Co.’s 12/1/02 journal entry.

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Adjustment of Foreign Currency Transaction at the Balance Sheet Date

Adjustment of Foreign Currency Transaction at the Balance Sheet Date

On 12/31/02, the value of the foreign currency receivable must be adjusted based on the

12/31/02 spot rate of $0.1500 per FF.Adjust the original receivable:

On 12/31/02, the value of the foreign currency receivable must be adjusted based on the

12/31/02 spot rate of $0.1500 per FF.Adjust the original receivable:

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Adjustment of Foreign Currency Transaction at the Balance Sheet Date

Adjustment of Foreign Currency Transaction at the Balance Sheet Date

On 12/31/02, the value of the foreign currency receivable must be adjusted based on the

12/31/02 spot rate of $0.1500 per FF.Adjust the original receivable:

On 12/31/02, the value of the foreign currency receivable must be adjusted based on the

12/31/02 spot rate of $0.1500 per FF.Adjust the original receivable:

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Strategies to Avoid Losses from Rate Fluctuations

Strategies to Avoid Losses from Rate Fluctuations

Insist that the transaction is consumated in

your own currency (US $).

Insist that the transaction is consumated in

your own currency (US $).

Hedging! Hedging!

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The practice of minimizing or eliminating risk of loss associated with foreign currency fluctuations by using forward exchange rates to offset changes in spot rates.

The practice of minimizing or eliminating risk of loss associated with foreign currency fluctuations by using forward exchange rates to offset changes in spot rates.

Spot RatesThe exchange rates that are

available today.

Forward Exchange RatesThe exchange rates that can be

locked in today for expected future exchange transactions.

Spot RatesThe exchange rates that are

available today.

Forward Exchange RatesThe exchange rates that can be

locked in today for expected future exchange transactions.

HedgingHedging

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This forward contract allows us to purchase 1,000,000 ¥ at a price

of $.0080 US in 30 days.

Good. If the spot rate is $.0090 US in 30 days,

we only have to pay $.0080 US, and we

avoid a $1,000 loss!

HedgingHedging

A forward contract requires the purchase ofcurrency units at a future date at the

contracted exchange rate.

A forward contract requires the purchase ofcurrency units at a future date at the

contracted exchange rate.

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Record anddisclose all

paym ents, properor im proper.

Influencepeddling is

illegal.(1986 Am endm ent)

Facilitatingpaym ents are

not illegal.(1986 Am endm ent)

Bribery ofgovernm entoffic ials is

illegal.

M aintain anadequatesystem of

internal controls.

Foreign Corrupt PracticesAct of 1977

Foreign Corrupt PracticesAct of 1977

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When the ad said, When the ad said, ““Job with a hot Job with a hot

future!future!” this isn’t ” this isn’t exactly what I exactly what I

expected.expected.

End of Chapter 15End of Chapter 15