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CHAPTER 15

CHAPTER 15. GOING INTERNATIONAL AND INTERNATIONAL ACCOUNTING STANDARDS. 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

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CHAPTER 15

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  1. CHAPTER 15 GOING INTERNATIONAL AND INTERNATIONAL ACCOUNTING STANDARDS

  2. 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

  3. Going International: Ways to Export (Choices Galore) • Independent distributor: • Foreign commission agent. • Foreign marketingbranch. • Foreign marketing subsidiary. • Export trade vehicle (FSC or IC-DISC).

  4. Ways to Export: The Concept of Physical Presence • 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 taxationin the foreign country. tax laws File a foreign income tax return.

  5. 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 “foreigntax 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) U.S. taxes owed........................ 15,000

  6. Foreign Earnings: When Are U.S. Taxes Actually Paid? • 3 possibilities exist: • Foreign branches: • When INCOMEis earned. • Foreign subsidiaries: • When DIVIDENDSare paid. • When INCOMEis earned (applies to “Subpart F” income) IRS

  7. Reasons for Manufacturing Overseas: The List is Long • The lure of cheap labor. • Tax holidays. • To establish a visible presence. • Lax environmental laws. Taxes Dumping allowed

  8. 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.

  9. 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.

  10. The Diversity of Worldwide GAAP: An Almost Unbelievable Cornucopia • Everything from soup to nuts. • The United States is part of the problem--manyU.S. standards are either rarelyused ornotused at all overseas: • LIFO inventory method. • Deferred income taxes. • Goodwill capitalization.

  11. Internationalize Accounting Standards: The Grand Dream • World GAAP--so many hurdles. • All are for it--BUTfew countries are willing to change their own GAAP.

  12. International Accounting Standards: World GAAP’s Advantages • Having a Uniform World GAAP: • Would greatly streamline the quarterly and year-end consolidation process for the accountants of publicly-owned companies.

  13. 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.

  14. 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 BIGadvantage: • Would greatly streamline the process by eliminating the need to comply with multiple GAAPs in offering securities.

  15. Efforts To Internationalize Accounting Standards: The FASB Hops Aboard • 2/97: FASB issues FAS 128“Earnings Per Share” conformingU.S. GAAP with world GAAP. • 6/01: FASB abolished the pooling of interests method conformingU.S. GAAPwith world GAAP.

  16. End of Chapter 15 • Time to Clear Things Up--Any Questions?

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