Isbn 978 0 393 63903 2

International Accounting Fourth Edition

Timothy Doupnik University of South Carolina

Hector Perera Macquarie University

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INTERNATIONAL ACCOUNTING, FOURTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2015 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2012, 2010, and 2005. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-0-07-786220-6 MHID 0-07-786220-1

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Library of Congress Cataloging-in-Publication Data

Doupnik, Timothy S. International accounting / Timothy Doupnik, University of South Carolina, Hector Perera, Macquarie University.—Fourth Edition. pages cm Includes bibliographical references and index. ISBN 978-0-07-786220-6 (alk. paper) 1. Accounting. 2. International business enterprises—Accounting. 3. Foreign exchange—

Accounting. I. Perera, M. H. B. II. Title. HF5636.D68 2014 657'.96—dc23 2013039346

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

www.mhhe.com

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To my wife, Birgit, and children, Stephanie and Alexander —TSD To my wife, Sujatha, and daughter, Hasanka —HBP

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iv

About the Authors Timothy S. Doupnik University of South Carolina Timothy S. Doupnik is a Professor of Accounting at the University of South Carolina, where he has been on the faculty since 1982, and primarily teaches ! nancial and international accounting. He served as director of the School of Accounting from 2003 until 2010, and then as Vice Provost for international affairs until 2013. He has an undergraduate degree from California State University–Fullerton, and received his master’s and Ph.D. from the University of Illinois.

Professor Doupnik has published exclusively in the area of international account- ing in various journals, including The Accounting Review; Accounting, Organizations, and Society; Abacus; Journal of International Accounting Research; Journal of Accounting Lit- erature; International Journal of Accounting; and Journal of International Business Studies.

Professor Doupnik is a past president of the International Accounting Section of the American Accounting Association, and he received the section’s Outstanding International Accounting Educator Award in 2008. He has taught or conducted re- search in the area of international accounting at universities in a number of coun- tries around the world, including Brazil, China, Dominican Republic, Finland, Germany, and Mexico.

Hector B. Perera Macquarie University Hector Perera is an Emeritus Professor at Massey University, New Zealand, and an Adjunct Professor at Macquarie University, Australia. Prior to joining Macquarie University in January 2007, he was at Massey University for 20 years. He has an undergraduate degree from the University of Peradeniya, Sri Lanka, and a Ph.D. from the University of Sydney, Australia.

Professor Perera’s research has dealt mainly with international accounting issues and has been published in a number of scholarly journals, including Journal of International Accounting Research; Critical Perspectives on Accounting; Journal of Accounting Literature; International Journal of Accounting; Advances in Accounting, incorporating Advances in International Accounting; Journal of International Financial Management and Accounting; Abacus; Accounting and Business Research; Accounting Historians Journal; Accounting, Auditing and Accountability Journal; Journal of Con- temporary Asia; British Accounting Review; Accounting Education—An International Journal; Australian Accounting Review; International Journal of Management Education; and Paci! c Accounting Review. In an article appearing in a 1999 issue of the Interna- tional Journal of Accounting, he was ranked fourth equal in authorship of interna- tional accounting research in U.S. journals over the period 1980–1996.

Professor Perera served as chair of the International Relations Committee of the American Accounting Association’s International Accounting Section in 2003 and 2004. He was an associate editor for the Journal of International Accounting Research and on the editorial boards of Accounting Horizons and Paci! c Accounting Review. Currently, he is on the editorial boards of Review of Accounting and Finance; Inter- national Journal of Accounting, Auditing and Performance Evaluation; and Qualitative Research in Accounting and Management.

Professor Perera has been a visiting professor at a number of universities, including the University of Glasgow in Scotland; New South Wales University, Wollongong University, and Charles Darwin University in Australia; Turku School of Economics and Business Administration and Åbo Akademi University in Finland; Unversiti Teknologi Mara, Malaysia; and University of Sharjah, UAE.

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v

Preface ORIENTATION AND UNIQUE FEATURES

International accounting can be viewed in terms of the accounting issues uniquely confronted by companies involved in international business. It also can be viewed more broadly as the study of how accounting is practiced in each and every coun- try around the world, learning about and comparing the differences in ! nancial reporting, taxation, and other accounting practices that exist across countries. More recently, international accounting has come to be viewed as the study of rules and regulations issued by international organizations—most notably International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). This book is designed to be used in a course that attempts to provide an overview of the broadly de! ned area of international accounting, but that focuses on the accounting issues related to international busi- ness activities and foreign operations and provides substantial coverage of the IASB and IFRS.

The unique bene! ts of this textbook include its up-to-date coverage of relevant material; extensive numerical examples provided in most chapters; two chapters devoted to the application of International Financial Reporting Standards (IFRS); and coverage of nontraditional but important topics such as strategic account- ing issues of multinational companies, international corporate governance, and corporate social reporting. This book contains several important distinguishing features:

Numerous excerpts from recent annual reports to demonstrate differences in ! nancial reporting practices across countries and to demonstrate ! nancial reporting issues especially relevant for multinational corporations.

Incorporation of research ! ndings into the discussion on many issues. Extensive end-of-chapter assignments that help students develop their analyti-

cal, communication, and research skills. Detailed discussion on the most recent developments in the area of interna-

tional harmonization/convergence of ! nancial reporting standards. Two chapters on International Financial Reporting Standards that provide

detailed coverage of a wide range of standards and topics. One chapter focuses on the ! nancial reporting of assets, and the second chapter focuses on liabilities, ! nancial instruments, and revenue recognition. (IFRS related to topics such as business combinations, foreign currency, and segment reporting are covered in other chapters.) The IFRS chapters also include numerical examples demon- strating major differences between IFRS and U.S. GAAP and their implications for ! nancial statements.

Separate chapters for foreign currency transactions and hedging foreign exchange risk and translation of foreign currency ! nancial statements. The ! rst of these chapters includes detailed examples demonstrating the accounting for foreign currency derivatives used to hedge a variety of types of foreign cur- rency exposure.

Separate chapters for international taxation and international transfer pricing, with detailed examples based on provisions in U.S. tax law.

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vi Preface

A chapter devoted to a discussion of the strategic accounting issues facing mul- tinational corporations, with a focus on the role accounting plays in strategy formulation and implementation.

Use of a corporate governance framework to cover external and internal audit- ing issues in an international context, with substantial coverage of the Sarbanes- Oxley Act of 2002.

A chapter on corporate social responsibility reporting, which is becoming increasingly more common among global enterprises.

CHAPTER-BY-CHAPTER CONTENT Chapter 1 introduces the accounting issues related to international business by following the evolution of a ! ctional company as it grows from a domestic com- pany to a global enterprise. This chapter provides the context into which the topics covered in the remaining chapters can be placed.

Chapters 2 and 3 focus on differences in ! nancial reporting across countries and the international convergence of accounting standards.

Chapter 2 presents evidence of the diversity in ! nancial reporting that exists around the world, explores the reasons for that diversity, and describes the problems that are created by differences in accounting practice across countries. In this chapter, we also describe and compare several major models of account- ing used internationally. We discuss the potential impact that culture has on the development of national accounting systems and present a simpli! ed model of the reasons for international differences in ! nancial reporting. The ! nal section of this chapter uses excerpts from recent annual reports to present additional examples of some of the differences in accounting that exist across countries.

Chapter 3 focuses on the major efforts worldwide to converge ! nancial report- ing practices, with an emphasis on the activities of the International Accounting Standards Board (IASB). We explain the meaning of convergence, identify the arguments for and against convergence, and discuss the use of the IASB’s In- ternational Financial Reporting Standards (IFRS), including national efforts to converge with those standards.

The almost universal recognition of IFRS as a high-quality set of global account- ing standards is arguably the most important development in the world of inter- national accounting. Chapters 4 and 5 introduce ! nancial reporting under IFRS for a wide range of accounting issues.

Chapter 4 summarizes the major differences between IFRS and U.S. GAAP. It provides detailed information on selected IFRS, concentrating on standards that relate to the recognition and measurement of assets—including inventories; property, plant, and equipment; intangible assets; and leased assets. Numeri- cal examples demonstrate the application of IFRS, differences between IFRS and U.S. GAAP, and the implications for ! nancial statements. This chapter also describes the requirements of IFRS in a variety of disclosure and presentation standards.

Chapter 5 focuses on current liabilities, provisions, employee bene! ts, share- based payment, income taxes, revenue, and ! nancial instruments, including major differences between IFRS and U.S. GAAP.

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Preface vii

Chapter 6 describes the accounting environment in ! ve economically signi! - cant countries—China, Germany, Japan, Mexico, and the United Kingdom—that are representative of major clusters of accounting systems. The discussion related to each country’s accounting system is organized into four parts: background, accounting profession, accounting regulation, and accounting principles and prac- tices. Exhibits throughout the chapter provide detailed information on differences between each country’s GAAP and IFRS, as well as reconciliations from local GAAP to U.S. GAAP.

Chapters 7, 8, and 9 deal with ! nancial reporting issues that are of particu- lar importance to multinational corporations. Two different surveys of business executives indicate that the most important topics that should be covered in an international accounting course are related to the accounting for foreign currency. 1 Because of its importance, this topic is covered in two separate chapters (Chapters 7 and 8). Chapter 9 covers three additional ! nancial reporting topics of particular importance to multinational corporations—in" ation accounting, business combi- nations and consolidated ! nancial statements, and segment reporting. Emphasis is placed on understanding IFRS related to these topics.

Chapter 7 begins with a description of the foreign exchange market and then demonstrates the accounting for foreign currency transactions. Much of this chapter deals with the accounting for derivatives used in foreign currency hedging activities. We ! rst describe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk. We then explain the concepts of cash " ow hedges, fair value hedges, and hedge accounting. Finally, we demonstrate the accounting for forward contracts and options used as cash " ow hedges and fair value hedges to hedge foreign cur- rency assets and liabilities, foreign currency ! rm commitments, and forecasted foreign currency transactions.

Chapter 8 focuses on the translation of foreign currency ! nancial statements for the purpose of preparing consolidated ! nancial statements. We begin by examining the conceptual issues related to translation, focusing on the concept of balance sheet exposure and the economic interpretability of the translation adjustment. Only after a thorough discussion of the concepts and issues do we then describe the manner in which these issues have been addressed by the IASB and by the U.S. FASB. We then illustrate application of the two methods prescribed by both standard-setters and compare the results. We discuss the hedging of balance sheet exposure and provide examples of disclosures related to translation.

Chapter 9 covers three additional ! nancial reporting issues. The section on in" ation accounting begins with a conceptual discussion of asset valuation and capital maintenance through the use of a simple numerical example and then summarizes the in" ation accounting methods used in different countries. The second section focuses on International Financial Reporting Standards related to business combinations and consolidations, covering issues such as

1 T. Conover, S. Salter, and J. Price, “International Accounting Education: A Comparison of Course Syllabi and CFO Preferences,” Issues in Accounting Education, Volume 9, Issue 2, Fall 1994; and T. Foroughi and B. Reed, “A Survey of the Present and Desirable International Accounting Topics in Accounting Educa- tion,” International Journal of Accounting, Volume 23, Number 1, Fall 1987, pp. 64–82.

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viii Preface

the determination of control, the acquisition method, proportionate consolida- tion, and the equity method. The ! nal section of this chapter focuses on Inter- national Financial Reporting Standard 8, Operating Segments.

Chapter 10 introduces issues related to the analysis of foreign ! nancial state- ments. We explore potential problems (and possible solutions to those problems) associated with using the ! nancial statements of foreign companies for decision- making purposes. This chapter also provides an example of how an analyst would reformat and restate ! nancial statements from one set of GAAP to another.

Business executives rank international taxation second only to foreign currency in importance as a topic to be covered in an international accounting course. 2 International taxation and tax issues related to international transfer pricing are covered in Chapters 11 and 12.

Chapter 11 focuses on the taxation of foreign operation income by the home- country government. Much of this chapter deals with foreign tax credits, the most important mechanism available to companies to reduce double taxation. This chapter provides a comprehensive example demonstrating the major issues involved in U.S. taxation of foreign operation income. We also discuss bene! ts of tax treaties, translation of foreign currency amounts for tax purposes, and tax incentives provided to attract foreign investment.

Chapter 12 covers the topic of international transfer pricing, focusing on tax implications. We explain how discretionary transfer pricing can be used to achieve speci! c cost minimization objectives and how the objectives of per- formance evaluation and cost minimization can con" ict in determining inter- national transfer prices. We also describe government reactions to the use of discretionary transfer pricing by multinational companies, focusing on the U.S. rules governing intercompany pricing.

Chapter 13 covers strategic accounting issues of particular relevance to multi- national corporations. This chapter discusses multinational capital budgeting as a vital component of strategy formulation and operational budgeting as a key in- gredient in strategy implementation. Chapter 13 also deals with issues that must be addressed in designing a process for evaluating the performance of foreign operations.

Chapter 14 covers comparative international auditing and corporate gover- nance. This chapter discusses both external and internal auditing issues as they re- late to corporate governance in an international context. Chapter 14 also describes international diversity in external auditing and the international harmonization of auditing standards.

Chapter 15 introduces the current trend toward corporate social reporting (CSR) by multinational corporations (MNCs). We describe theories often used to explain CSR practices by companies and the motivations for them to engage in CSR practices. We also examine the implications of climate change for CSR. Fur- ther, we discuss some issues associated with regulation of CSR at the international level and identify international organizations that promote CSR, such as Global Reporting Initiative (GRI). Finally, we provide examples of actual CSR practices by MNCs.

2 Ibid.

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Preface ix

CHANGES IN THE FOURTH EDITION

Chapter 1

Updated statistics provided in the section titled “The Global Economy” Updated End-of-Chapter (EOC) assignments based on annual reports and other dated

material to the most current information available

Chapter 2

Noted that inflation is no longer as important in explaining accounting diversity as it once was and that European accountants need to develop an expertise in both local GAAP and IFRS

Chapter 3

Updated exhibits on excerpts from annual reports of various companies Added two new sections at the end of the chapter titled “Challenges to International

Convergence of Financial Reporting Standards” and “New Direction to the IASB” Added three new Exercises and Problems to the EOC material

Chapter 4

Noted that the discussion in the section on “Leases” is based on guidance in effect at the time of publication, and that a revised IASB-FASB exposure draft issued in 2013 was likely to substantially change and converge lease accounting at some unknown future date

Chapter 5

Deleted the subsection on “Proposed Amendments to IAS 37” Rewrote the subsection on “Post-Employment Benefits” to reflect the new guidance

provided in IAS 19 (Revised), which was issued in 2011 Rewrote several Exercises and Problems in the EOC material related to post-

employment benefits to reflect the changes in IAS 19 (Revised) Deleted the subsection on “Termination Benefits” Removed reference to a 2009 IASB Exposure Draft from the section on “Income Taxes” In the subsection titled “IASB-FASB Revenue Recognition Project,” removed some of

the specific discussion and an example based upon the 2011 IASB-FASB joint Expo- sure Draft, and noted that a new standard, if approved, would not become effective any earlier than 2017

Chapter 6

Updated annual report excerpts Added new material incorporating the latest developments with regard to financial

reporting in China, Germany, Japan, Mexico, and the United Kingdom Added three new Questions and one new Exercise and Problem to the EOC material

Chapter 7

Updated annual report excerpts and the related discussion Updated Exhibit 7.1 to provide recent exchange rates and the related discussion

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x Preface

Enhanced explanation of several journal entries related to the accounting for a “Forward Contract Designated as Cash Flow Hedge”

Deleted the subsection titled “The Euro” Updated Case 7-2 to be based on more recent exchange rates

Chapter 8

Updated annual report excerpts and the related discussion Updated the U.S dollar-to-euro exchange rates used in the example provided in

“Translation Process Illustrated” to more current levels

Chapter 9

Updated annual report excerpts and the related discussion Added a subsection on “Identification of Highly Inflationary Countries” Deleted the subsection on “Proportionate Consolidation” and removed the require-

ments in EOC Exercise and Problem 6 related to proportionate consolidation Added discussion of IFRS 11 in the section titled “Equity Method” Updated EOC Exercise and Problem 10 to be based on the most current annual report

disclosures available

Chapter 10

Deleted the discussion related to leases in the subsection titled “Extent of Disclosure”

Chapter 11

Updated information in several Exhibits providing income, withholding, and treaty tax rates and updated Case 11-1 to reflect changes in these rates

Chapter 12

Updated statistics related to the extent of international intercompany transfers, the use of various transfer pricing methods, the use of advance pricing agreements, and the enforcement of transfer pricing regulations

Chapter 13

Replaced Exhibit 13.14, “Rockwater’s Balanced Scorecard,” with “Use of Balanced Scorecard at Veolia Water”

Revamped Case 13-2, Lion Nathan Limited, in the EOC material

Chapter 14

Updated Exhibits 14.5 and 14.6, and “Appendix to Chapter 14” on excerpts from annual reports of various companies.

Chapter 15

Added new material incorporating GRI’s fourth-generation guidelines issued in 2013 Updated Exhibits 15.4, 15.5, and 15.6 Added a new Case 15-1, Modco Inc., to the EOC material

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Preface xi

SUPPLEMENTARY MATERIAL International Accounting is accompanied by supplementary items for both students and instructors. The Online Learning Center ( www.mhhe.com/doupnik4e ) is a book-speci! c website that includes the following supplementary materials.

For Students: PowerPoint Presentation

For Instructors: Access to all supplementary materials for students Instructor’s Manual PowerPoint Presentation Test Bank

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xii

Acknowledgments We want to thank the many people who participated in the review process and offered their helpful comments and suggestions:

Wagdy Abdallah Seton Hall University Kristine Brands Regis University Bradley Childs Belmont University Teresa Conover University of North Texas Orapin Duangploy University of Houston–Downtown Gertrude Eguae-Obazee Albright College Emmanuel Emmenyonu Southern Connecticut State University Charles Fazzi Saint Vincent College Mark Finn Northwestern University Leslie B. Fletcher Georgia Southern University Paul Foote California State University–Fullerton Mohamed Gaber State University of New York at Plattsburgh Giorgio Gotti University of Massachusetts–Boston Shiv Goyal University of Maryland University College Robert Gruber University of Wisconsin

Marianne James California State University–Los Angeles Cynthia Jeffrey Iowa State University Craig Keller Missouri State University Victoria Krivogorsky San Diego State University Britton McKay Georgia Southern University Jamshed Mistry Suffolk University Gregory Naples Marquette University Cynthia Nye Bellevue University Randon C. Otte Clarion University Obeua Persons Rider University Felix Pomeranz Florida International University Grace Pownall Emory University Juan Rivera University of Notre Dame Kurt Schulzke Kennesaw State University Mary Sykes University of Houston–Downtown

We are also thankful to Gary Blumenthal, chief ! nancial of! cer of The Forbes Consulting Group and instructor at Stonehill College, who revised the PowerPoint slides and Test Bank to accompany the third edition of the text.

We also pass along many thanks to all the McGraw-Hill Education who partici- pated in the creation of this book. In particular, Executive Brand Manager James Heine, Development Editor Gail Korosa, and Senior Marketing Manager Kathleen Klehr.

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xiii

8 Translation of Foreign Currency Financial Statements 403

9 Additional Financial Reporting Issues 448

10 Analysis of Foreign Financial Statements 492

11 International Taxation 541

12 International Transfer Pricing 586

13 Strategic Accounting Issues in Multinational Corporations 621

14 Comparative International Auditing and Corporate Governance 674

15 International Corporate Social Reporting 739

About the Authors iv

Preface v

Chapter

1 Introduction to International Accounting 1

2 Worldwide Accounting Diversity 23

3 International Convergence of Financial Reporting 65

4 International Financial Reporting Standards: Part I 118

5 International Financial Reporting Standards: Part II 179

6 Comparative Accounting 232

7 Foreign Currency Transactions and Hedging Foreign Exchange Risk 339

Brief Contents

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xiv

Access to Foreign Capital Markets 31 Comparability of Financial Statements 32 Lack of High-Quality Accounting Information 33

Accounting Clusters 33 A Judgmental Classi! cation of Financial Reporting Systems 34

An Empirical Test of the Judgmental Classi! cation 35 The In" uence of Culture on Financial Reporting 37

Hofstede’s Cultural Dimensions 37 Gray’s Accounting Values 37 Religion and Accounting 39

A Simpli! ed Model of the Reasons for International Differences in Financial Reporting 41

Examples of Countries with Class A Accounting 42 Recent Changes in Europe 42

Further Evidence of Accounting Diversity 43 Financial Statements 43 Format of Financial Statements 43 Level of Detail 47 Terminology 47 Disclosure 49 Recognition and Measurement 53

Summary 54 Appendix to Chapter 2 The Case of Daimler-Benz 55 Questions 57 Exercises and Problems 58 Case 2-1: The Impact of Culture on Conservatism 60 Case 2-2: SKD Limited 62 References 63

Chapter 3 International Convergence of

Financial Reporting 65

Introduction 65 International Accounting Standard- Setting 66 Harmonization Efforts 68

International Organization of Securities Commissions 68 International Federation of Accountants 69 European Union 69

About the Authors iv Preface v

Chapter 1 Introduction to International

Accounting 1

What Is International Accounting? 1 Evolution of a Multinational Corporation 2

Sales to Foreign Customers 2 Hedges of Foreign Exchange Risk 4 Foreign Direct Investment 4 Financial Reporting for Foreign Operations 6 International Income Taxation 7 International Transfer Pricing 7 Performance Evaluation of Foreign Operations 8 International Auditing 8 Cross-Listing on Foreign Stock Exchanges 9 Global Accounting Standards 10

The Global Economy 10 International Trade 10 Foreign Direct Investment 11 Multinational Corporations 12 International Capital Markets 14

Outline of the Book 14 Summary 15 Questions 16 Exercises and Problems 17 Case 1-1: Besserbrau AG 19 Case 1-2: Vanguard International Growth Fund 20 References 22

Chapter 2 Worldwide Accounting Diversity 23

Introduction 23 Evidence of Accounting Diversity 24 Reasons for Accounting Diversity 28

Legal System 28 Taxation 29 Providers of Financing 29 In" ation 30 Political and Economic Ties 30 Correlation of Factors 30

Problems Caused by Accounting Diversity 31 Preparation of Consolidated Financial Statements 31

Contents

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Contents xv

The International Forum on Accountancy Development (IFAD) 72 The International Accounting Standards Committee (IASC) 72

Creation of the IASB 75 The Structure of the IASB 77

Arguments for and against International Convergence of Financial Reporting Standards 82

Arguments for Convergence 82 Arguments against Convergence 82

A Principles-Based Approach to International Financial Reporting Standards 83 The IASB Framework 84

The Need for a Framework 84 Objective of Financial Statements and Underlying Assumptions 84 Qualitative Characteristics of Financial Statements 85 Elements of Financial Statements: De! nition, Recognition, and Measurement 85 Concepts of Capital Maintenance 86

International Financial Reporting Standards 86 Presentation of Financial Statements (IAS 1) 86 First-Time Adoption of International Financial Reporting Standards (IFRS 1) 90 International Convergence toward IFRS 92 The Adoption of International Financial Reporting Standards 94 IFRS in the European Union 96 IFRS in the United States 98

Support for a Principles-Based Approach 98 The SEC and IFRS Convergence 99 Challenges to International Convergence 100 New Direction for the IASB 102 The FASB and IFRS Convergence 103 The Norwalk Agreement 103 AICPA and IFRS Convergence 105 Revision of the Conceptual Framework 106

Some Concluding Remarks 108 Summary 109 Appendix to Chapter 3 What Is This Thing Called Anglo- Saxon Accounting? 110 Questions 112 Exercises and Problems 113 Case 3-1: Jardine Matheson Group (Part 1) 115 References 116

Chapter 4 International Financial Reporting

Standards: Part I 118

Introduction 118 Types of Differences between IFRS and U.S. GAAP 119 Inventories 120

Lower of Cost or Net Realizable Value 121 Property, Plant, and Equipment 122

Recognition of Initial and Subsequent Costs 123 Measurement at Initial Recognition 123 Measurement Subsequent to Initial Recognition 124 Depreciation 130 Derecognition 130

Investment Property 131 Impairment of Assets 131

De! nition of Impairment 131 Measurement of Impairment Loss 132 Reversal of Impairment Losses 133

Intangible Assets 134 Purchased Intangibles 135 Intangibles Acquired in a Business Combination 136 Internally Generated Intangibles 136 Revaluation Model 141 Impairment of Intangible Assets 141

Goodwill 141 Impairment of Goodwill 142 Goodwill Not Allocable to Cash-Generating Unit under Review 144

Borrowing Costs 146 Leases 147

Lease Classi! cation 147 Finance Leases 149 Operating Leases 150 Sale–Leaseback Transaction 150 Disclosure 151 IASB/FASB Convergence Project 153 Other Recognition and Measurement Standards 153

Disclosure and Presentation Standards 154 Statement of Cash Flows 154 Events after the Reporting Period 155 Accounting Policies, Changes in Accounting Estimates, and Errors 156 Related Party Disclosures 157 Earnings per Share 157 Interim Financial Reporting 158 Noncurrent Assets Held for Sale and Discontinued Operations 158 Operating Segments 158

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xvi Contents

Classi! cation of Financial Assets and Financial Liabilities 206 Measurement of Financial Instruments 208 Available-for-Sale Financial Asset Denominated in a Foreign Currency 210 Impairment 211 Derecognition 211 Derivatives 213 Receivables 213

Summary 215 Questions 217 Exercises and Problems 218 Case 5-1: S. A. Harrington Company 230

Chapter 6 Comparative Accounting 232

Introduction 232 People’s Republic of China (PRC) 234

Background 234 Accounting Profession 236 Accounting Regulation 241 Accounting Principles and Practices 246

Germany 257 Background 257 Accounting Profession 258 Accounting Regulation 259 Accounting Principles and Practices 263 Issues Related to the Adoption of IFRS in Germany 267

Japan 277 Background 277 Accounting Profession 278 Accounting Regulation 281 Accounting Principles and Practices 284

Mexico 291 Background 291 Accounting Profession 293 Accounting Regulation 294 Accounting Principles and Practices 297

United Kingdom 303 Background 303 Accounting Profession 303 Accounting Regulation 305 Accounting Principles and Practices 309

Summary 325 Questions 327 Exercises and Problems 328 Case 6-1: China Petroleum and Chemical Corporation 329 References 336

Summary 159 Questions 161 Exercises and Problems 162 Case 4-1: Bessrawl Corporation 177 References 178

Chapter 5 International Financial Reporting

Standards: Part II 179

Introduction 179 Current Liabilities 179 Provisions, Contingent Liabilities, and Contingent Assets 180

Contingent Liabilities and Provisions 180 Onerous Contract 182 Restructuring 183 Contingent Assets 183 Additional Guidance 184

Employee Bene! ts 185 Short-Term Bene! ts 185 Post-employment Bene! ts 185 Other Long-Term Employee Bene! ts 188

Share-Based Payment 188 Equity-Settled Share-Based Payment Transactions 189 Cash-Settled Share-Based Payment Transactions 190 Choice-of-Settlement Share-Based Payment Transactions 191

Income Taxes 193 Tax Laws and Rates 193 Recognition of Deferred Tax Asset 194 Disclosures 195 IFRS versus U.S. GAAP 195 Financial Statement Presentation 196

Revenue Recognition 197 General Measurement Principle 197 Identi! cation of the Transaction Generating Revenue 197 Sale of Goods 197 Rendering of Services 199 Interest, Royalties, and Dividends 200 Exchanges of Goods or Services 200 IAS 18, Part B 200 Customer Loyalty Programs 201 Construction Contracts 202 IASB–FASB Revenue Recognition Project 203

Financial Instruments 204 De! nitions 204 Liability or Equity 205 Compound Financial Instruments 205

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Contents xvii

Use of Hedging Instruments 375 Foreign Currency Borrowing 377

Foreign Currency Loan 379 Summary 379 Appendix to Chapter 7 Illustration of the Accounting for Foreign Currency Transactions and Hedging Activities by an Importer 380 Questions 392 Exercises and Problems 393 Case 7-1: Zorba Company 401 Case 7-2: Porto! no Company 402 Case 7-3: Better Food Corporation 402 References 402

Chapter 8 Translation of Foreign Currency Financial

Statements 403

Introduction 403 Two Conceptual Issues 404

Example 404 Balance Sheet Exposure 407

Translation Methods 408 Current/Noncurrent Method 408 Monetary/Nonmonetary Method 408 Temporal Method 409 Current Rate Method 410 Translation of Retained Earnings 411 Complicating Aspects of the Temporal Method 413

Disposition of Translation Adjustment 414 U.S. GAAP 415

FASB ASC 830 416 Functional Currency 416 Highly In" ationary Economies 417

International Financial Reporting Standards 418 The Translation Process Illustrated 420 Translation of Financial Statements: Current Rate Method 421

Translation of the Balance Sheet 422 Computation of Translation Adjustment 424

Remeasurement of Financial Statements: Temporal Method 424

Remeasurement of Income Statement 424 Computation of Remeasurement Gain 426

Nonlocal Currency Balances 427 Comparison of the Results from Applying the Two Different Methods 428

Underlying Valuation Method 428 Underlying Relationships 429

Chapter 7 Foreign Currency Transactions

and Hedging Foreign Exchange Risk 339

Introduction 339 Foreign Exchange Markets 340

Exchange Rate Mechanisms 340 Foreign Exchange Rates 341 Spot and Forward Rates 343 Option Contracts 344

Foreign Currency Transactions 344 Accounting Issue 345 Accounting Alternatives 345 Balance Sheet Date before Date of Payment 347

Hedging Foreign Exchange Risk 349 Accounting for Derivatives 350

Fundamental Requirement of Derivatives Accounting 351 Determining the Fair Value of Derivatives 351 Accounting for Changes in the Fair Value of Derivatives 351

Hedge Accounting 352 Nature of the Hedged Risk 352 Hedge Effectiveness 353 Hedge Documentation 353

Hedging Combinations 353 Hedges of Foreign-Currency-Denominated Assets and Liabilities 354 Forward Contract Used to Hedge a Recognized Foreign-Currency-Denominated Asset 355

Forward Contract Designated as Cash Flow Hedge 357 Forward Contract Designated as Fair Value Hedge 361

Foreign Currency Option Used to Hedge a Recognized Foreign-Currency-Denominated Asset 363

Option Designated as Cash Flow Hedge 365 Spot Rate Exceeds Strike Price 367 Option Designated as Fair Value Hedge 368

Hedges of Unrecognized Foreign Currency Firm Commitments 368

Forward Contract Used as Fair Value Hedge of a Firm Commitment 368 Option Used as Fair Value Hedge of Firm Commitment 371

Hedge of Forecasted Foreign-Currency- Denominated Transaction 373

Option Designated as a Cash Flow Hedge of a Forecasted Transaction 374

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xviii Contents

Foreign Portfolio Investment 494 International Mergers and Acquisitions 494 Other Reasons 495

Potential Problems in Analyzing Foreign Financial Statements 495

Data Accessibility 495 Language 496 Currency 498 Terminology 499 Format 500 Extent of Disclosure 500 Timeliness 502 Differences in Accounting Principles 503 International Ratio Analysis 506

Restating Financial Statements 508 Explanation of Reconciling Adjustments 513 Comparison of Local GAAP and U.S. GAAP Amounts 518

Summary 519 Appendix to Chapter 10 Morgan Stanley Dean Witter: Apples to Apples 520 Questions 523 Exercises and Problems 523 Case 10-1: Swisscom AG 535 References 539

Chapter 11 International Taxation 541

Introduction 541 Investment Location Decision 541 Legal Form of Operation 542 Method of Financing 542

Types of Taxes and Tax Rates 542 Income Taxes 542 Tax Havens 544 Withholding Taxes 546 Tax-Planning Strategy 547 Value-Added Tax 547

Tax Jurisdiction 548 Worldwide versus Territorial Approach 548 Source, Citizenship, and Residence 549 Double Taxation 550

Foreign Tax Credits 551 Credit versus Deduction 551 Calculation of Foreign Tax Credit 552 Excess Foreign Tax Credits 553 FTC Baskets 555 Indirect Foreign Tax Credit (FTC for Subsidiaries) 556

Hedging Balance Sheet Exposure 429 Disclosures Related to Translation 432 Summary 434 Questions 435 Exercises and Problems 436 Case 8-1: Columbia Corporation 443 Case 8-2: Palmerstown Company 445 References 447

Chapter 9 Additional Financial Reporting

Issues 448

Introduction 448 Accounting for Changing Prices (In" ation Accounting) 449

Impact of In" ation on Financial Statements 449 Purchasing Power Gains and Losses 450 Methods of Accounting for Changing Prices 450 General Purchasing Power (GPP) Accounting 452 Current Cost (CC) Accounting 453 In" ation Accounting Internationally 454 International Financial Reporting Standards 457 Translation of Foreign Currency Financial Statements in Hyperin" ationary Economies 460 Identi! cation of High In" ation Countries 463

Business Combinations and Consolidated Financial Statements 463

Determination of Control 464 Scope of Consolidation 467 Full Consolidation 467 Equity Method 472

Segment Reporting 474 Operating Segments—The Management Approach 475 Example: Application of Signi! cance Tests 476 Operating Segment Disclosures 478 Entity-Wide Disclosures 478

Summary 482 Questions 483 Exercises and Problems 483 References 491

Chapter 10 Analysis of Foreign Financial

Statements 492

Introduction 492 Overview of Financial Statement Analysis 492 Reasons to Analyze Foreign Financial Statements 494

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Contents xix

Advance Pricing Agreements 607 Enforcement of Transfer Pricing Regulations 609

Worldwide Enforcement 610 Summary 611 Questions 612 Exercises and Problems 613 Case 12-1: Litch! eld Corporation 618 Case 12-2: Global Electronics Company 619 References 620

Chapter 13 Strategic Accounting Issues in

Multinational Corporations 621

Introduction 621 Strategy Formulation 622

Capital Budgeting 622 Capital Budgeting Techniques 626 Multinational Capital Budgeting 629 Illustration: Global Paper Company 631

Strategy Implementation 637 Management Control 637 Operational Budgeting 640

Evaluating the Performance of Foreign Operations 641

Designing an Effective Performance Evaluation System for a Foreign Subsidiary 642 Performance Measures 643 Financial Measures 643 Non! nancial Measures 643 Financial versus Non! nancial Measures 644 The Balanced Scorecard (BSC): Increased Importance of Non! nancial Measures 646 Responsibility Centers 648 Foreign Operating Unit as a Pro! t Center 649 Separating Managerial and Unit Performance 650 Uncontrollable Items 650 Choice of Currency in Measuring Pro! t 652 Foreign Currency Translation 652 Choice of Currency in Operational Budgeting 653 Incorporating Economic Exposure into the Budget Process 656 Implementing a Performance Evaluation System 659

Culture and Management Control 660 Summary 661 Questions 663 Exercises and Problems 663 Case 13-1: Canyon Power Company 665 Case 13-2: Lion Nathan Limited 667 References 672

Tax Treaties 557 Model Treaties 558 U.S. Tax Treaties 558 Treaty Shopping 560

Controlled Foreign Corporations 561 Subpart F Income 561 Determination of the Amount of CFC Income Currently Taxable 562 Safe Harbor Rule 562

Summary of U.S. Tax Treatment of Foreign Source Income 562

Example: U.S. Taxation of Foreign Source Income 562 Translation of Foreign Operation Income 565

Translation of Foreign Branch Income 566 Translation of Foreign Subsidiary Income 567 Foreign Currency Transactions 568

Tax Incentives 568 Tax Holidays 569 U.S. Export Incentives 570

1. Describe a time when you were in a homogeneous social identity group (with people of the same category as yourself), and you had a conversation about people in a different identity group. (Examples: a group of women talking about men or vice versa; a group of heterosexuals talking about gay people; etc.) Explain the circumstances and describe your feelings at the time. Looking back on it, how do you feel about it now?

(Based on Chapter 1, p. 21, question 11)

2. Select one of the dominant ideologies listed below, and explain how you have had personal experience with this ideology and its effects, or else when you have witnessed the effects of this ideology on someone else (e.g., someone in your real world, not a fictional media character).

a) Patriarchy – The belief that (male) men are superior to all women

b) White supremacy – The belief that the “White” race is superior over all others

c) Culture of poverty – The idea that the poor have in-born traits (innate inferiorities) that keep them poor

d) Heteronormativity – The belief that heterosexuality is the only normal sexual orientation

(Based on Chapter 2, p. 39, question #11)

3. Do you think that women and men communicate differently? If so, why? What are some examples of this? Do these differences vary when gender intersects with other social identities such as race, ethnicity, or age?

(Based on Chapter 3, p. 63, question 8)

4. Do you identify with a race or ethnicity that is not a part of your family history (i.e., as far as you know, you have no relatives or ancestors belonging to that race or ethnicity)? Where do you believe this identification comes from? Has your expression of this identification ever annoyed or offended any family members, or anyone else?

(Adapted from Chapter 4, p. 91, question 5)

5. Have you ever “passed” as a member of a social class different than your own? For example, if you come from a low-income background, have you ever made an effort to be perceived as wealthy? Or if you come from wealth, have you ever made an effort to be perceived as low-income or middle class? What was your motivation for doing this? Did you succeed? Why or why not?

(Adapted from Chapter 5, p. 113, question 14)

6. Do you think that workplaces should have policies regarding romantic relationships among employees? If you think the use of such a policy should depend on the type of workplace, explain how you think dating policies should be different at different types of workplaces.

(Adapted from Chapter 6, p. 135, question 7)

7. What do you think of the disability activist perspective that “disability is simply a normal variation of human diversity”? Related to this, how do you feel about the Deaf community’s belief that they represent a linguistic minority?

(From Chapter 7, p. 159, question 5)

8. Have you ever worked with someone from a different age group than yours? What were the positives and negatives of that experience? Did the other person have expectations of you that were based on the norms of his/her own birth cohort? Do you think you had expectations of the other person based on the norms of your birth cohort?