15 CHAPTER 15 GOING INTERNATIONAL AND INTERNATIONAL ACCOUNTING STANDARDS Slide 15-1 15 FOCUS OF CHAPTER 15 ● Globalization of Business: Ways to Export ■ Ways to Manufacture Overseas ■ Reasons for Manufacturing Overseas ■ ● International Accounting Standards: The Diversity of Worldwide GAAP ■ Efforts to Harmonize Worldwide GAAP ■ Slide 15-2 15 ● ● ● ● ● Going International: Ways to Export (Choices Galore) Independent distributor: Foreign commission agent Foreign marketing branch Foreign marketing subsidiary Export trade vehicle (FSC or IC-DISC) Slide 15-3 Ways to Export: The Concept of Physical Presence 15 ● Defined: Having an “operation” overseas Examples: SALES OFFICE, WAREHOUSE, FACTORY, EMPLOYING FOREIGN CITIZENS AS SALES PERSONNEL ● To make a determination: ■ ■ Review foreign tax laws Review tax treaty ● Significance: Subject to taxation tax laws in the foreign country File a foreign income tax return Slide 15-4 15 Foreign Earnings: DOUBLE Corporate Taxation??? ● Income of foreign units are taxed overseas and in the U.S BUT DON’T PANIC ● U.S tax laws allow a “foreign tax credit.” Tax Calculation for Brazil U.S Pretax income of foreign unit 100,000 100,000 Applicable tax rate 20% 35% Income taxes owed 20,000 35,000 Less Allowable tax credits (20,000) 15,000 SlideU.S 15-5 taxes owed 15 Foreign Earnings: When Are U.S Taxes Actually Paid? ●3 possibilities exist: ■ Foreign branches: IRS ▲ When INCOME is earned ■ Foreign subsidiaries: ▲ When DIVIDENDS are paid ▲ When INCOME is earned (applies to “Subpart F” income) Slide 15-6 15 Reasons for Manufacturing Overseas: The List is Long ● The lure of cheap labor ● Tax holidays Taxes ● To establish a visible presence ● Lax environmental laws Dumping allowed Slide 15-7 15 Reasons for Manufacturing Overseas: The List is Long ● High literacy rates & safe environments ● A Strong work ethic ● Loan guarantees, grants, subsidies ● The fluctuating exchange rate problem Slide 15-8 15 Risks of Investing Overseas: All That Glitters Is Not Gold ● Expropriation the seizure of assets by the foreign government ● Devaluations/weakening of the foreign currency ● Currency transfer restrictions Wouldn’t it be nice to be able to bring the profits home? ● Wars and civil disorders ● Government mandated changes in the investment climate Slide 15-9 The Diversity of Worldwide GAAP: An Almost Unbelievable Cornucopia 15 ● Everything from soup to nuts ● The United States is part of the problem many U.S standards are either rarely used or used at all overseas: LIFO inventory method ■ Deferred income taxes ■ Goodwill capitalization ■ Slide 15-10 not 15 Internationalize Accounting Standards: The Grand Dream ●World GAAP so many hurdles ●All are for it BUT few countries are willing to change their own GAAP Slide 15-11 International Accounting Standards: World GAAP’s Advantages 15 ● Having a Uniform World GAAP: ■ Would greatly streamline the quarterly and year-end consolidation process for the accountants of publicly-owned companies Slide 15-12 15 Efforts To Internationalize Accounting Standards: Progress Has Been Slow ● The International Accounting Standards Board [“Committee” prior to 2001] (created in 1973 London based) ● IASB Standards to date: Minimal impact-still fairly easy to comply with virtually all IASB Standards Slide 15-13 15 Efforts To Internationalize Accounting Standards: Capital Market Forces ● The Capital Markets-A much-needed injection: ■ Relatively recent trend of raising capital in world markets has given greatly added emphasis to the desirability of having a world GAAP The BIG advantage: ▲ Would greatly streamline the process by eliminating the need to comply with multiple GAAPs in offering securities Slide 15-14 15 Efforts To Internationalize Accounting Standards: The FASB Hops Aboard ● 2/97: FASB issues FAS 128 “Earnings Per Share” conforming U.S GAAP with world GAAP ● 6/01: FASB abolished the pooling of interests method conforming U.S GAAP with world GAAP Slide 15-15 15 End of Chapter 15 ●Time to Clear Things Up-Any Questions? Slide 15-16