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15CHAPTER 15

GOING INTERNATIONAL AND

INTERNATIONAL ACCOUNTING STANDARDS

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15FOCUS 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

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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).

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15 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 taxation in the foreign country. File a foreign

income tax return.

tax laws

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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... 100,000 100,000Applicable tax rate....................... 20% 35% Income taxes owed.................. 20,000 35,000Less--Allowable tax credits........ (20,000) U.S. taxes owed........................ 15,000

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15 Foreign Earnings: When Are U.S. Taxes Actually Paid?

3 possibilities exist:

Foreign branches:

When INCOME is earned.

Foreign subsidiaries:

When DIVIDENDS are paid.

When INCOME is earned (applies to “Subpart F” income)

IRS

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15 Reasons for Manufacturing Overseas: The List is Long

The lure of cheap labor.

Tax holidays.

To establish a visible presence.

Lax environmental laws.

Dumping allowed

Taxes

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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.

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15Risks 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.

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15 The Diversity of Worldwide GAAP:An Almost Unbelievable Cornucopia

Everything from soup to nuts. The United States is part of the

problem--many U.S. standards are either rarely used or not used at all overseas: LIFO inventory method. Deferred income taxes. Goodwill capitalization.

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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.

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15 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.

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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.

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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.

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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 conforming U.S. GAAPwith world GAAP.

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15End of Chapter 15

Time to Clear Things Up--Any Questions?