International Final

  1. Reciprocity/Mutual Recognition
    Regulators outside the home country accept a firm's financial statements.
  2. Reconciliation
    limited restatement
  3. Advantages of Mutual Recognition
    Least costly, encourages cross-listing
  4. Disadvantages of mutual recognition
    Does not improve comparability, unlevel playing field
  5. Advantages of Reconciliation
    comparability, less expensive than a full restatement
  6. Disadvantages of reconciliation
    Does not provide the full picture.
  7. Three approaches for dealing with international accounting differences:
    Mutual recognition, reconciliation, international standards
  8. International Standards advantages
    Increases comparability, lowers cost of capital, better resource allocation
  9. Harmonization
    Narrow the differences between existing standards
  10. Standardization
    Eliminate all the differences, all are the same.
  11. Convergence
    Like harmonization, but can create new.
  12. Fourth Directive
    1978 - Format, disclosures, valuation, true and fair view, only applies to individual company financial statements.
  13. Seventh Directive
    1983 - Consolidated financial statements
  14. Eighth Directive
    1984 - ammended and became Statutory Audit Directive - 2006 - Auditor qualifications, auditor rotation, audit standards,, all statutory auditors must follow ISA, each member state must establish a public oversight body, established the EGAOB (Audit oversight). (Like SOX)
  15. Transparency Directive
    2007 - Annual and interim reporting requirements for listed companies, responsibility statement by the board of directors (for both annual and half-year), narrative management report (quarterly)
  16. EU IFRS Adoption
    EFRAG interacts with IASB, SARG considers whether EFRAG's opinion is well balanced and objective, ARC considers EFRAG's and SARG's advice and either recommends endorsement or not based on whether the standard is condusive to the Europeon public good, EC approves or doesn't.
  17. Have all IFRS's been adopted by the EU?
    All except for a carve out of IAS 39.
  18. IFAC
    Global organization of professional bodies (Like the AICPA and NIvRA). Its IAASB sets International Standards on Auditing (ISA). It is the leading organization for the harmonization of audit standards.
  19. IAASB
    Sets international audit standards. (ISA). Part of IFAC.
  20. OECD
    Organization of market-economy countries. Promotes good governance in companies.
  21. Objectives of the IASB
    Comparability, transparency, high quality standards, understandability. Promote the use of the standards. Consider the needs of SMEs and emerging economies. Converging national accounting standards with IFRS.
  22. IASB structure
    Trustees - IASB Board - IFRS Interpretations Committe. Monitoring Board overall. IFRS Advisory Council (seperate).
  23. IASB Board
    15 members (4 from NA), make IFRSs
  24. IFRS Interpretations Committee
    14 members. Implementation guidance.
  25. IASB Trustees
    Raise funds, assign members to groups - 22 members (6 from NA).
  26. IFRS Advisory Council
    Over 30 members. Gives advice to the board or trustees about their agendas.
  27. Monitoring Board
    Overseers. Appoint trustees. Representatives of securities market regulators (SEC is a member)
  28. IASB Standards Setting Process
    Discussion paper with arguments for and against, exposure draft issued for public comment, examine comments and decide on final form. ED's and Standards can only be issued with at least 9 votes.
  29. Timeline
    1973 - IASC formed with 9 countries, goal of harmonization, fair presentation as guiding principle, issued IASs with many alternative treatments allowed, Comparability Project (E32). 2001 - IASB formed, convergence, IFRS. 2002 - EU 2005, all EU listed companies had to follow IFRS by 2005. 2006 - Memorandum of Understanding, convergence of US GAAP and IFRS. 2007 - SEC eliminates reconciliation for IFRS financial statements.
  30. FASB Standards setting process
    Develops agenda from various inputs, Technical Staff researches, discussion memorandum issued for comment, exposure draft issued for public comment, 3 of 5 must approve.
  31. Hail Scenarios
    Maintain U.S. GAAP, maintain U.S. GAAP with continued convergence, allow a choice between IFRS and US GAAP but with reconciliation, allow unrestricted choice, US specific IFRS (IFRS+), Set a conditioned timetable to adopt IFRS, Create international US GAAP.
  32. Functional Currency
    Primary currency in which an entity does business and generates/spends cash
  33. If the functional currency is the local currency that means...
    that the subsidiary is self-contained, and has independent operations
  34. If the functional currency is the parent's currency that means...
    that the subsidiary is dependent, and just an extension of the parent.
  35. If the functional currency is the local currency then use what method?
    Current rate method - since the subsidiary is independent the the gain/loss should effect the consolidated financial statements.
  36. If the functional currency is the parent's currency then use what method?
    Temporal method
  37. How does inflation affect exchange rates?
    High inflation causes currency to lose value.
  38. How does the monetary policy of a country affect exchange rates?
    Lose monetary policy increases the money supply and results in higher inflation. Thus, devalues the currency.
  39. How does the balance of trade affect the exchange rate?
    If imports are greater than exports the currency is weakened. If exports are greater than imports the currency is strengthened. (Indirect)
  40. How does the balance of payements affect the exchange rate?
    If more is spent and invested abroad then the currency is devalued. (Indirect)
  41. How does the international monetary reserves and debt capacity affect the exchange rate?
    Devaluation can be prevented by drawing on savings or borrowing, but as resources decrease the likelihood of devaluation increases.
  42. How does the national budget affect the exchange rate?
    Deficits caused by excess spending can worsen inflation.
  43. How do forward exchange quotations affect the exchange rate?
    If a currency can be acquired for future delivery at a deep discount, then there will be reduced confidence in the currency.
  44. How do unofficial rates affect the exchange rate?
    Unofficial rates increase the spread and increases pressure for the government to align with market rates.
  45. How does the behavior of related curriences affect exchange rates?
    Currencies will behave similarly to those countries they have close economic ties to.
  46. How do interest rate differentials affect exchange rates?
    Paying higher interest strengthens the currency.
  47. Political factors that affect the exchange rate?
    Exchange controls, tariffs, safe currencies
  48. Foreign exchange risk
    Risk associated with fluctuating exchange rates, can have an impact on the value of assets, earnings and cash flows.
  49. Economic exposure
    Risk that future operations, including future cash flows, may be affect by exchange rate changes.
  50. Transaction exposure
    risk that current operation/actual transactions will be affected by exchange rate fluctuations. Real cash flow effects.
  51. Translation exposure
    Risk that value may be reduced due to foreign currency translation. No true value is lost, just on paper. (Accounting exposure)
  52. What is the current rate? What does it cause?
    The exchange rate on the financial statements date. End of the year rate. Its use causes translation gains or losses.
  53. What is the historic rate? What does it cause?
    The exchange rate when the transaction happened. Its use shields from translation gains or losses.
  54. What is the weighted or average rate?
    Beginning rate + ending rate / 2. (Variation of the current rate).
  55. Current Rate Method
    Current rate for A/L, I/S items use average rate. Capital accounts use the historic rate. The imbalance goes on the balance sheet and into OCI.
  56. Current-Noncurrent method
    Current A/L use the current rate (& COGS). Long-term A/L use the historic rate (& depreciation). I/S items use the average rate. Imbalance can go to either.
  57. Monetary-Nonmonetary method
    Monetary A/L use the current rate (receivables,payables, long-term debt). Nonmonetary A/L use the historic rate (inventory, COGS, depreciation) I/S items use the average rate. Imbalance can go to either.
  58. Temporal method
    Monetary A/L use current rate, nonmonetary A/L if valued at historic cost use historic rate and if valued at fair value use current rate. I/S items use the average rate. Imbalance goes to income.
  59. FAS 52
    Reflect the financial results and relationships measured in the functional currency. If functional currency is local use current rate method. If functional currency is parent's use temporal method. In hyperinflationnary economy use temporal method.
  60. Direct taxes
    Easy to recognize and normally are disclosed on a firm's financial statements. Income tax.
  61. Indirect Tax
    Not so clearly recognized or as frequently disclosed. Import duties, value-added tax, withholding tax.
  62. Withholding taxes
    Taxes imposed by the government on dividends and interest.
  63. Value-added taxes
    Consumption tax. Levied on the value added at each stage of production or distribution.
  64. Classical system
    Taxes are levied at the corporate level and the shareholder level. Double taxation.
  65. Integrated System
    Corporate and shareholder taxes are integrated to reduce or eliminate double taxation. Variations: imputation/tax credit and split rate system.
  66. Tax credit/Imputation system
    Variation of the integrated system. Tax levied at the corporate level, but part can be treated as a credit for shareholders.
  67. Territorial View
    Only tax corporations based on income generated in the country.
  68. Worldwide View
    Tax income no matter where it was generated.
  69. Tax deferral
    Pay tax when the income is repatriated.
  70. Tax Holiday
    Relief from paying taxes for a certain period of time.
  71. Tax haven
    A country with low or no income tax.
  72. Variables affecting transfer price
    Tariffs, taxes, competitive factors, environmental risk, performance evaluation, resolving trade-offs, cosmetic reasons
  73. How do taxes affect transfer price?
    Move profits to subsidiaries in low tax countries by having a low transfer price.
  74. How do tariffs affect transfer price?
    Lower the transfer price when exporting goods to a high tariff country.
  75. How do competitive factors affect transfer price?
    The parent can subsides the subsidiary by charging a lower cost in order to increase market share.
  76. How do enviromental risks affect transfer price?
    Charge a higher price for subsidiaries in high inflation countries. Charge more if in a country with an unstable government. Move cash to stable countries.
  77. If local management sets the transfer price?
    May not be good for the overall firm, but allows for flexibility. Also reflects economic reality better.
  78. If central management sets the transfer price?
    The decision takes the entire company into consideration, but reduces local flexibility. Also distorts the numbers.
  79. Advance Pricing Agreement (APA)
    MNC and tax authority agree on the transfer price methodology. (3 years in US)
  80. Transfer Price Methods
    Comparable uncontrolled price, comparable uncontrolled transaction, resale price method, cost-plus pricing method (Transaction based methods), comparable profits method, profit-splitting method (Profits based methods).
  81. Comparable Uncontrolled Price Method
    Use the open market price, or the price the company would charge a third party. Usually used for commodities.
  82. Comparable Uncontrolled Transaction
    For intangibles. Use external benchmarks to determine price for same or similar transfer of intangibles.
  83. Resale Price Method
    Works backwards. Begins with final price when sold to third party, margin to cover expenses and normal profit is deducted to derive the transfer price. Good for distributors.
  84. Cost-Plus Pricing Method
    Works forwards. Markup is added to the cost to determine the transfer price. Useful for semi-finished goods.
  85. Comparable Profits Method
    Similarly situated firms should earn similar returns over a reasonable period of time.
  86. Profit-Split Method
    When no benchmarks are available. Divides profits among affiliated companies in an arm's-length fashion.
  87. Unitary Tax Approach (Formulary Appointment)
    Alternative to transfer pricing. Takes MNC profits and splits based on criteria.
  88. List the EU directives
    Fourth (1978, Seventh (1983), Eighth (1984) (Statutory Audit Directive [2006]), Transparency Directive (2007)
  89. Subpart F Income
    If a U.S. MNC is using a foreign subsidiary to conceal profits, then that income is considered Subpart F income and is subject to taxation.
  90. Advantages of an APA
    Reduces or eliminates the risk of an audit, saves everyone time and money, increases stability.
  91. Disadvantages of an APA
    Potentially lost opportunities, cost to setup, could reveal sensitive information.
  92. What method for transfer pricing does the IRS say should be used?
    The best method for the company.
  93. What are the two types of classifications for transfer price methods?
    Transactions based (popular) and profits based.
  94. What does the EGAOB do?
    Coordinates the activities of the EU member states' public oversight bodies.
  95. Gain/Loss on Settled Transactions
    Whenever the exchange rate used to book the original transaction differs from the rate used at settlement.
  96. Gain/Loss on Unsettled Transactions
    Whenever the financial statements are prepared before a transaction has been settled. G/L results from the restatement process, no cash flows are affected.
  97. Disadvantages of the current rate method:
    Assumes that all local currency assets are exposed to exchange risk, does not align with economic reality, translating items valued at historic cos using the current rate distorts, creates translation g/l every time.
  98. Disadvantages of the Current-noncurrent method
    Does not usually align with economic reality, based on a classification scheme.
  99. Disadvantages of the Monetary-nonmonetary method
    Relies on a classification scheme, distorts profit margins by matching sales at current prices/rates against cost of sales measured at historic costs/rates.
  100. Pro of the monetary-nonmonetary method
    Since monetary items are settled in cash the use of the current rate is appropriate.
  101. Pro of the Temporal method
    Does not change the attribute of an item just its unit of measure.
  102. FAS 8
    Use only the temporal method.
  103. Benefit of FAS 52
    Helped remove income volitality
  104. Statutory vs Effective tax rates
    The statutory rate does not equal the effective tax rate. Due to items such as depreciation and social overhead. A low tax rate does not necessarily mean a low tax burden.
  105. Split-rate system
    A lower tax is levied on distributed earnings. Variant of the integrated system. Used in the US.
  106. Section 482 of the IRC
    Requires that intracompany transfers be based on an arm's-length price.
  107. IOSO
    International group of security market regulators. Promote high quality standards and the development of markets.
  108. Differences between IFRS and US GAAP
    Principles-based, allows revaluation, prohibites extraordinary items, consolidation is based on control, joint ventures use either proportional consolidation or equity method, capitalize development costs, prohibits LIFO.
  109. Factors that affect exchange rates (10)
    Inflation, monetary policies, balance of trade, balance of payments, internal monetary reserves/debt capacity, national budget, forward exchange quotes, unofficial rates, behavior of related currencies, interest rates
  110. Current-Noncurrent exposure?
    Only current A/L are exposed to exchange risk, because they are used in operations.
  111. Monetary-Nonmonetary exposure?
    Only monetary A/L are exposed to exchange risk, because monetary items can be converted into dollars.
  112. Current rate method exposure?
    All A/L are exposed.
  113. Temporal basis of accounting?
    Accounting theory arguments, preserves the attribute.
  114. Arguments for translation G/L to be included in income?
    Reflects the effects of exchange rates, shouldn't hide risks, deferral is artificial.
  115. Arguments against translation G/L to be included in income?
    The G/L is artificial, it is only on paper and there is not cash flow affect.
  116. Transfer price
    Exchange between units of the same company
Card Set
International Final
International Final