International Accounting Exam 2

Classification of Political Risk

(I) SOURCE (a) Foreign Governments (b) Influential Business, Political, Social segment (c) Private Individuals (i.e., terrorists)

Integrated Report, One Report or EGSEE Report

economic, governance, social, ethical and environmental.

Translation Monetary/Nonmonetary Method

Monetary assets and liabilities are translated at the current exchange rate. Nonmonetary assets and liabilities and stockholders' equity accounts are translated at historical exchange rates.

Current Rate Method

Objective is to reflect that the parent's entire investment in a foreign subsidiary is exposed to exchange risk. All assets and liabilities are translated at the current exchange rate. Stockholders' equity accounts are translated at historical exchange rates. Income statement items are translated at the exchange rate in effect at the time of the transaction. All assets and liabilities translated at current rate. This results in net asset exposure. Net asset exposure and devaluing foreign currency results in translation loss. Translation adjustment included in equity.

Buying rate

The buying rate is the rate at which money dealers will buy foreign currency

Strategies to Minimize Political Risk

1. Joint Ventures 2. Risk Diversification 3. Vertical Integration 4. External Financial Stakeholders 5. Technology Barriers 6. Codes of Conduct 7. Insurance

Trnalsation Current/Noncurrent Method

Current assets and liabilities are translated at the current exchange rate. Noncurrent assets and liabilities and stockholders' equity accounts are translated at historical exchange rates. Method is seldom used in any countries and is not allowed by U.S. GAAP or IFRS.

In translating the financial statements of a foreign subsidiary into the parent's reporting currency under the current rate method, which of the following statements is true? Expenses are translated using a combination of current and historical exchange rates. Intangible assets are translated at the historical exchange rates in effect on the date the assets are purchased. The translation adjustment is a function of the foreign subsidiary's net assets. The translation adjustment is a function of the relative amount of monetary assets and monetary liabilities held by the foreign subsidiary.

The translation adjustment is a function of the foreign subsidiary's net assets.

What is the concept underlying the two-transaction perspective in accounting for foreign currency transactions?

Under the two-transaction perspective, an export sale (import purchase) and the subsequent collection (payment) of cash are treated as two separate transactions to be accounted for separately. The idea is that management has made two decisions: (1) to make the export sale, and (2) to extend credit in foreign currency to the foreign customer. The income effect from each of these decisions should be reported separately.

Import purchase

a company purchases from a foreign supplier and later pays in the supplier's currency.

►Several stock exchanges now encourage GRI-compliant Sustainability Reports for certain listed companies selling stock. For instance:

►the Securities and Exchange Board of India mandated that listed entities must submit Business Responsibility Reports, as a part of their Annual Reports. ►the Brazil Stock Exchange recommended listed companies to either publish a Sustainability Report or explain why they do not. ► ►Singapore Stock Exchange issued a "Policy Statement on Sustainability Reporting" encouraging listed companies in the Exchange to voluntarily commit to sustainability practices and reporting. ► ►the U.S. Nasdaq recommended listed companies to either publish a Sustainability Report or explain why they do not.

A foreign subsidiary of Wampoa Ltd. has one asset (inventory) and no liabilities. The subsidiary operates with a significant degree of autonomy from Wampoa and primarily uses the local currency (the won) in carrying out its transactions. Since the date the inventory was acquired, the won has decreased in value in relation to Wampoa's reporting currency. In translating the foreign subsidiary's won financial statements into the parent's reporting currency, which of the following is true under IFRS? A translation gain must be reported in net income. A positive translation adjustment must be reported in stockholders' equity. A negative translation adjustment must be reported in stockholders' equity. A translation loss must be reported in net income.

A negative translation adjustment must be reported in stockholders' equity.

Foreign Exchange Rate Volatility

Exchange rate volatility creates the possibility of FX gains and FX losses for companies involved in international business.

IFRS

IAS 21, The Effects of Changes in Foreign Exchange Rates is the relevant accounting standard. Uses the functional currency approach developed by the FASB. The standard includes a list, similar to the FASB list, of indicators as guidance for the foreign currency decision.

Selling rate

The selling rate is the rate at which money dealers will sell foreign currency

Stakeholder value can be generated by...

►managing risks, enhancing an organization's reputation, creating new business opportunities, bettering financial reporting and developing best practices that all relate to reporting on sustainability: ►Risk management might include minimizing climate change, mitigating consumer activism, reducing regulatory intervention, ensuring operational compliance, preventing fraud, promoting ethical behavior. ►Reputational enhancement might include the improvement and strengthening of brand, stakeholder relations, employee recruitment and retention and rankings (such as the Dow Jones Sustainability Index).

International Political Risk

"The potential for loss of profits or impairment of assets caused by the actions of a foreign government or politically related events in a foreign country."

Which one of the following items is remeasured using the current exchange rate under the temporal method? Accounts payable. Dividends declared. Additional paid-in capital. Amortization expense.

Accounts payable.

In the translated financial statements, which method of translation maintains the underlying valuation methods used in the foreign currency financial statements? Current rate method; income statement translated at average exchange rate for the year. Current rate method; income statement translated at exchange rate at the balance sheet date. Temporal method. Monetary/nonmonetary method.

C By translating items carried at historical cost by the historical exchange rate, the temporal method maintains the underlying valuation method used by the foreign subsidiary.

Translating Foreign Currency Financial Statements - Conceptual Issues

Foreign country operations usually prepare financial statements using local (foreign) currency as the monetary unit. These financial statements must be translated into home country currency. These operations also typically use local GAAP (accounting rules). Financial statements must be translated into home country GAAP.

Sustainability and the Role of the Professional Accountant: Auditing

►Internal audit functions will have a large role in managing and monitoring risks and controls around sustainability, including compliance, operations and reporting. Internal auditors might also be involved in tracking company improvements on previous audit findings. ►External auditors will be responsible for assessments and third-party verifications of sustainability measures, which are expected to become more commonplace based on stakeholder demands for accountability and with possibilities of increased regulation. The same standards of third-party assurance that have long been used to validate financial information are increasingly being applied to sustainability reporting. The skills developed performing audits will be easily applied to many TBL performance indicators.

►Today, many companies are voluntarily preparing sustainability reports. However, while the concept of sustainability includes economic performance, most sustainability reports generally only report on environmental, social and governance/ethics performance To address this demand, the International Integrated Reporting Council (IIRC) was created in.

August 2010

What factors create a balance sheet (or translation) exposure to foreign exchange risk? How does balance sheet exposure compare with transaction exposure?

Balance sheet exposure arises when a foreign currency balance is translated at the current exchange rate. By translating at the current exchange rate, the foreign currency item in essence is being revalued in U.S. dollar terms on the consolidated financial statements. There will be either a net asset balance sheet exposure or net liability balance sheet exposure depending upon whether assets translated at the current rate are greater or less than liabilities translated at the current rate. Balance sheet exposure generates a translation adjustment, which does not result in an inflow or outflow of cash. Transaction exposure, which results from the receipt or payment of foreign currency, generates foreign exchange gains and losses that are realized in cash.

In accordance with International Financial Reporting Standards (IFRS), which translation combination would be appropriate for a foreign operation whose functional currency is the currency of the host country (foreign currency)? a.Temporal Separate component of stockholders' equity b.Temporal Gain or loss in income statement c.Current rate Separate component of stockholders' equity d.Current rate Gain or loss in income statement

8. C When the foreign currency is the functional currency, IFRS requires translation using the current rate method with translation adjustments reflected in accumulated other comprehensive income in stockholders' equity.

Garden Grove Corporation made a sale to a foreign customer on September 15, Year 1, for 100,000 foreign currency units (FCU). Payment was received on October 15, Year 1. The following exchange rates apply: Date U.S. Dollar per FCU September 15, Year 1 $0.40 September 30, Year 1 0.42 October 15, Year 1 0.37 Required: Prepare all journal entries for Garden Grove Corporation in connection with this sale, assuming that the company closes its books on September 30 to prepare interim financial statements.

9/15/Y1 Accounts receivable (FCU) [100,000 x $.40] $40,000 Sales $40,000 9/30/Y1 Accounts receivable (FCU) [100,000 x ($.42-$.40)] $2,000 Foreign exchange Gain $2,000 10/15/Y1 Foreign exchange loss $5,000 Accounts receivable (FCU) [100,000 x ($.37-$.42)] $5,000 Cash $37,000 Accounts receivable (FCU) $37,000

On September 30, Year 1, the Lester Company negotiated a two-year loan of 1,000,000 markkas from a foreign bank at an interest rate of 2 percent per annum. Interest payments are made annually on September 30, and the principal will be repaid on September 30, Year 3. Lester Company prepares U.S.-dollar financial statements Page 270and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing, assuming the following exchange rates for 1 markka: Date U.S. Dollars per Markka September 30, Year 1 $0.20 December 31, Year 1 0.21 September 30, Year 2 0.23 December 31, Year 2 0.24 September 30, Year 3 0.27 Required: Prepare all journal entries for the Lester Company in connection with the foreign currency borrowing. What is the effective annual cost of borrowing in dollars in Year 1, Year 2, and Year 3?

9/30/Y1 Cash $200,000 Note payable (markka) [1,000,000 x $.20] $200,000 (To record the note and conversion of 1 million markkas into $ at the spot rate.) 12/31/Y1 Interest expense $1,050 Interest payable (markka) $1,050 [1,000,000 x 2% x 3/12 = 5,000 markkas x $.21 spot rate] (To accrue interest for the period 9/30 - 12/31/Y1.) Foreign exchange loss $10,000 Note payable (markka) [1 mn x ($.21 - $.20)] $10,000 (To revalue the note payable at the spot rate of $.21 and record a foreign exchange loss.) 9/30/Y2 Interest expense [15,000 markkas x $.23] $3,450 Interest payable (markka) 1,050 FOREX loss [5,000 markkas x ($.23- $.21)] 100 Cash [20,000 markkas x $.23] $4,600 (To record the first annual interest payment, record interest expense for the period 1/1 - 9/30/Y2, and record a foreign exchange loss on the interest payable accrued at 12/31/Y1.) 12/31/Y2 Interest expense $1,200 Interest payable (markka) [5,000 markkas x $.24] $1,200 (To accrue interest for the period 9/30 - 12/31/Y2.) Foreign exchange loss $30,000 Note payable (markka) [1 mn x ($.24 - $.21)] $30,000 (To revalue the note payable at the spot rate of $.24 and record a foreign exchange loss.) 9/30/Y3 Interest expense [15,000 markkas x $.27] $4,050 Interest payable (markka) 1,200 Foreign exchange loss [5,000 markkas x ($.27 - $.24)] 150 Cash [20,000 markkas x $.27] $5,400 (To record the second annual interest payment, record interest expense for the period 1/1 - 9/30/Y3, and record a foreign exchange loss on the interest payable accrued at 12/31/Y2.) Note payable (markka) $240,000 Foreign exchange loss 30,000 Cash [1 mn markkas x $.27] $270,000 (To record payment of the 1 million markka note.)

What are the theories often used to explain the sustainability reporting practices of firms?

A number of theories have been used to explain sustainability reporting practices by firms, such as stakeholder theory and legitimacy theory. The stakeholder theory posits that environmental disclosures are made by company management in response to the stakeholder demand for environmental (and social) information. However, it fails to explain why firms from similar industries operating in the same geographic area provide different disclosures. On the other hand, legitimacy theory posits that sustainability reporting is a means to deal with the firm's exposure to political, economic, and social pressures. According to legitimacy theory, firms behave in a way that is considered to be congruent with the society's perceived goals to legitimize their performance.

Joe Inc., a U.S. company, makes a sale and ships goods to Jose, SA, a Mexican customer, for $100,000 U.S. (not in pesos) It is agreed that Jose will pay in pesos . The exchange (spot) is 10 pesos per U.S. dollar. How many pesos does Jose agree to pay?

Answer is 1,000,000 pesos. Joe has foreign exchange risk exposure because he may receive less than $100,000. Suppose the peso decreases such that in 30 days the exchange rate is $0.09 per 1 peso. Joe will receive 1,000,000 pesos which will be worth $90,000 (1,000,000 x $0.09) and Joe receives $10,000 less due to exchange rate fluctuation.

Balance Sheet Exposure

Assets and liabilities translated at the current exchange rate are exposed to risk of a translation adjustment. When foreign currency appreciates, a net asset exposure results in a positive translation adjustment. When foreign currency appreciates, a net liability exposure results in a negative translation adjustment. Assets and liabilities translated at the historical exchange rate are not exposed to a translation adjustment.

In accordance with U.S. generally accepted accounting principles (GAAP), which translation combination would be appropriate for a foreign operation whose functional currency is the U.S. dollar? a.Temporal Separate component of stockholders' equity b.Temporal Gain or loss in income statement c.Current rate Separate component of stockholders' equity d.Current rate Gain or loss in income statement

B When the U.S. dollar is the functional currency, U.S. GAAP requires remeasurement using the temporal method with remeasurement gains and losses reported in net income. 7The functional currency is the currency of the subsidiary's primary economic environment. It is usually identified as the currency in which the company generates and expends cash. U.S. GAAP stipulates that several factors such as the location of primary sales markets, sources of materials and labor, the source of financing, and the amount of intercompany transactions should be evaluated in identifying an entity's functional currency. U.S. GAAP does not provide any guidance as to how these factors are to be weighted (equally or otherwise) when identifying an entity's functional currency. IAS 21 also provides factors to be considered in determining the functional currency of a foreign subsidiary. Unlike U.S. GAAP, IAS 21 provides a hierarchy of factors to consider. Two primary factors are first to be considered. If evaluation of these primary factors does not clearly indicate a foreign subsidiary's functional currency, then a group of six secondary factors should be considered.

Hedging Balance Sheet Exposure

Companies that have foreign subsidiaries with highly integrated operations use the temporal method. The temporal method requires translation gains and losses to be recognized in income. Losses negatively affect earnings, and both gains and losses increase earnings volatility. These gains and losses result from the combination of balance sheet exposure and exchange rate fluctuations. Companies can also hedge to offset the effects of the translation adjustment to equity under the current rate method. Companies can hedge against gains and losses by using foreign currency forward contracts, options, and borrowings.

Primary conceptual issues

Each financial statement accounting must be translated using the appropriate exchange rate. Choices include the current exchange rate, average exchange rate, and the historical exchange rate. Current exchange rate is as of the balance sheet date, while historical exchange rate is as of the date of the transaction. The resulting translation adjustment can be recognized in current income or included in an equity account on the balance sheet.

Foreign Exchange Rates

Exchange rates, to the U.S. dollar, are published in many places on the internet and in newspapers. Exchange rates are reflected both as US $ equivalent (direct quotes) and currency per US $ (indirect quotes). A direct quote is the reciprocal of an indirect quote and vice-versa.

U.S. GAAP

FASB ASC 830, Foreign Currency Matters( formerly SFAS 52, Foreign Currency Translation) is the relevant accounting standard. Requires identification of functional currency. Functional currency is the primary currency of the foreign subsidiary's operating environment. The standard includes a list of indicators as guidance for the foreign currency decision. When functional currency is U.S. Dollar, temporal method is required. When functional currency is foreign currency, current rate method is required.

A company makes an export sale denominated in a foreign currency and allows the customer one month to pay. Under the two-transaction perspective, accrual approach, how does the company account for fluctuations in the exchange rate for the foreign currency?

Foreign currency receivables resulting from export sales are revalued at the end of accounting periods using the current spot rate. An increase in the value of a receivable will be offset by reporting a foreign exchange gain in net income, and a decrease will be offset by a foreign exchange loss. Foreign exchange gains and losses are accrued even though they have not yet been realized.

What factors create a foreign exchange gain on a foreign currency transaction? What factors create a foreign exchange loss?

Foreign exchange gains and losses are created by two factors: having foreign currency exposures (foreign currency receivables and payables) and changes in exchange rates. Appreciation of the foreign currency will generate foreign exchange gains on receivables and foreign exchange losses on payables. Depreciation of the foreign currency will generate foreign exchange losses on receivables and foreign exchange gains on payables.

What is GRI-informed reporting?

GRI-informed reporting is practiced by companies that choose to use features of the GRI system but are unwilling to commit to using the full system. IKEA and ExxonMobil were two examples presented in the chapter. Both companies expended considerable resources to produce in-depth sustainability reports. However, each chose not to fully align with the GRI system as a way of exerting more control over the reporting outcomes. IKEA developed idiosyncratic methods of reporting on its supply chain. ExxonMobil used reporting standards developed by the petroleum industry.

What is the Global Reporting Initiative?

Global Reporting Initiative was formed in 1997 by U.S.-based nonprofits Ceres (formerly the Coalition for Environmentally Responsible Economies) and Tellus Institute, with the support of the United Nations Environment Program (UNEP). It is a network-based organization that has developed the world's most widely used sustainability reporting framework. This framework has been developed by participants drawn globally from business, civil society, labor, and professional institutions. It sets out the principles and indicators for organizations to measure and report their economic, environmental, and social performance. Currently, more than 2,500 organizations use the guidelines to produce their sustainability reports. G4, GRI's fourth generation guidelines issued in 2013, is still used by many companies. In 2018, the GRI replaced G4 guidelines with new GRI standards. The new standards specify specific disclosures in lieu of indicators, the term used by GRI G4. However, the list of GRI disclosures closely corresponds to the GRI G4's set of indicators.

International Financial Reporting Standards

IAS 15, Information Reflecting the Effects of Changing Prices was issued in 1981. This standard has been withdrawn due to lack of support. The relevant standard now is IAS 29, Financial Reporting in Hyperinflationary Economies. IAS 29 is required for some companies located in environments experiencing very high levels of inflation. IAS 29 includes guidelines for determining the environments where it must be used. Nonmonetary assets and liabilities and stockholders' equity are restated using a general price index. Income statement items are restated using a general price index from the time of the transaction. Purchasing power gains and losses are included in net income.

Transaction types, exposure type and gain or loss - import purchases

Import purchase à liability exposure -- if foreign currency appreciates à foreign exchange loss. Import purchase à liability exposure -- if foreign currency depreciates à foreign exchange gain.

General Accounting

In a typical accounting role, professionals will need to be accountable for sustainability measurements, transactions and key performance indicators that will ultimately be reported internally to management and externally to stakeholders. This accountability will grow in prominence as regulation over sustainability increases and the value that stakeholders place on sustainability increases.

Latin America

Latin America has a long history of significant inflation. Brazil, Chile, and Mexico have developed sophisticated inflation accounting standards over time. Like the U.S. and U.K., Brazil has abandoned inflation accounting. Mexico's Bulletin B-10, Recognition of the Effects of Inflation in Financial Information, is a well-known example.

Translation Temporal Method

Objective is to translate financial statements as if the subsidiary had been using the parent's currency. Items carried on subsidiary's books at historical cost, including all stockholders'equity items, are translated at historical exchange rates. Items carried on subsidiary's books at current value are translated at current exchange rates. Income statement items are translated at the exchange rate in effect at the time of the transaction. Primarily monetary assets and liabilities translated at current rate. This often results in net liability exposure. Net liability exposure and devaluing foreign currency result in translation gain. Translation gain included in current income.

United States and United Kingdom

SFAS 33, Financial Reporting and Changing Prices briefly required large U.S. companies to provide GPP and CC accounting disclosures. This information is now optional (SFAS 89) and few companies provide it. In the U.K., SSAP 16 required current cost information, but this was later rescinded. Both countries have experienced low rates of inflation since the 1980s, which is why the inflation accounting requirements were lifted.

Which one of the following items is normally translated the same way under both the current rate and temporal methods of translation? Inventory. Equipment. Sales revenue. Depreciation expense.

Sales revenue.

Study Current Method, will be on exam

Study Current Method, will be on exam

Study Temporal method, will be on exam

Study Temporal method, will be on exam

What is sustainability reporting ?

Sustainability reporting augments the traditional financial reporting by providing information about the entity's social and environmental performance. Companies generally publish this information in separate reports that are analogous to annual reports in that they cover the most recently completed fiscal year. Some companies practice integrated reporting, which means that they include an array of social and environmental disclosures in their annual reports rather than publish separate sustainability reports.

GRI

The Global Reporting Initiative (GRI) is an international, multi-stakeholder and independent non-profit organization that promotes economic, environmental and social sustainability. The GRI was established in 1997 in partnership with the United Nations' Environment Programme (UNEP).

In what way is the accounting for a foreign currency borrowing more complicated than the accounting for a foreign currency account payable?

The accounting for a foreign currency borrowing involves keeping track of two foreign currency payables--the note payable and interest payable. As both the face value of the borrowing and accrued interest represent foreign currency liabilities, both are exposed to foreign exchange risk and can give rise to foreign currency gains and losses.

Sustainability

The key considerations that are critical to the development of an equitable future include Social, Economic and Environmental

What is the concept underlying the current rate method of translation? What is the concept underlying the temporal method of translation? How does balance sheet exposure differ under these two methods?

The major concept underlying the current rate method is that the entire foreign investment is exposed to foreign exchange risk. Therefore, all assets and liabilities are translated at the current exchange rate. Balance sheet exposure under this concept is equal to the net investment. The major concept underlying the temporal method is that the translation process should result in a set of translated U.S. dollar financial statements as if the foreign subsidiary's transactions had actually been carried out using U.S. dollars. To achieve this objective, assets carried at historical cost and stockholders' equity are translated at historical exchange rates; assets carried at current value and liabilities (carried at current value) are translated at the current exchange rate. Under this concept, the foreign subsidiary's monetary assets and liabilities are considered to be foreign currency cash, receivables, and payables of the parent that are exposed to transaction risk. For example, if the foreign currency appreciates, then the foreign currency receivables increase in U.S. dollar value and a gain is recognized. Balance sheet exposure under the temporal method is analogous to the net transaction exposure that exists from having both receivables and payables in a particular foreign currency.

What are the major procedural differences in applying the current rate and temporal methods of translation?

The major differences relate to non-monetary assets carried at historical cost and related expenses, i.e., inventory and cost of goods sold; property, plant, and equipment and depreciation expense; and intangible assets and amortization expense. Under the temporal method, these items are all translated at historical exchange rates. Under the current rate method, the assets are translated at the current exchange rate and the related expenses are translated at the average exchange rate for the current period.

What is the primary difference between the GRI and the Sustainability Accounting Standards Board (SASB)?

The reporting framework developed by the Sustainability Accounting Standards Board (SASB) is focused on the information needs of investors and requirements to disclose material information inherent in U.S. securities law. The most explicit of these requirements is the SEC's requirement to include climate change-related disclosures in 10-Ks. In essence, it gauges materiality by determining what a reasonable investor would want to know in making an investment decision. The GRI has a broader goal of meeting the information needs of the entity's various stakeholders.

What are the two major conceptual issues that must be resolved in translating foreign currency financial statements?

The two major issues related to the translation of foreign currency financial statements are: (a) which method should be used and (b) where should the resulting translation adjustment be reported in the consolidated financial statements. The first issue relates to determining the appropriate exchange rate (historical, current, or average for the current period) for the translation of foreign currency balances. Those items translated at the current exchange rate are exposed to translation adjustment. The second issue relates to whether the translation adjustment should be treated as a gain or loss in income, or should be deferred as a separate component of stockholders' equity.

Reporting:

Those accountants involved in an external reporting function will require strong familiarity with a reporting framework such as GRI.

One transaction perspective

Treats sale and collection as one transaction. Transaction is complete when foreign currency is received and converted, and sale is measured at converted amount. This approach is not allowed under IAS or U.S. GAAP.

Two transaction perspective

Treats sale and collection as two transactions Sale is one transaction and collection is a second transaction. Sale is based on current exchange rate. If exchange rate changes, collection is for different amount. Difference is considered foreign exchange gain or loss. Concepts are identical for purchase transaction.

Impact of inflation on financial statements

Understated asset values. Overstated income and overpayment of taxes. Demands for higher dividends. Differing impacts across companies resulting in lack of comparability. Historical cost ignores purchasing power gains and losses. Purchasing power losses result from holding monetary assets, such as cash and accounts receivable. Purchasing power gains result from holding monetary liabilities, such as accounts payable. The two most common approaches to inflation accounting are general purchasing power accounting and current cost accounting.

What are the four categories into which GRI standards are divided?

Universal, Economic, Environmental, and Social.

General Purchasing Power (GPP) Accounting

Updates historical cost accounting for changes in the general purchasing power of the monetary unit. Also referred to as General Price-Level-Adjusted Historical Cost Accounting (GPLAHC). Nonmonetary assets and liabilities, stockholders' equity and income statement items are restated using the General Price Index (GPI). Requires purchasing power gains and losses to be included in net income.

Current Cost (CC) Accounting

Updates historical cost of assets to the current cost to replace those assets. Also referred to as Current Replacement Cost Accounting (CRC). Nonmonetary assets are restated to current replacement costs and expense items are based on these restated costs. Holding gains and losses are included in equity.

Export sale

a company sells to a foreign customer and later receives payment in the customer's currency.

Integrated Reporting

a new approach to corporate reporting that demonstrates the linkages between an organization's strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing."

A foreign currency receivable will generate a foreign exchange gain when the foreign currency...

increases in dollar value. A foreign currency payable will generate a foreign exchange gain when the foreign currency decreases in dollar value. Hence, the correct combination is yen (increase) and real (decrease).

An import purchase causes a foreign currency payable to be carried...

on the books. If the foreign currency depreciates, the dollar value of the foreign currency payable decreases, yielding a foreign exchange gain.

Foreign exchange risk

the chance that the exporter will receive less or that the importer will pay more than anticipated as a result of a change in the exchange rate.

Forward rate

today's price for purchasing or selling a foreign currency for some future date.

Spot rate

today's price for purchasing or selling a foreign currency.

Premium

when the forward rate is greater than the spot rate for a particular day.

Discount

when the forward rate is less than the spot rate for a particular day.

Examples of Political Risk

•Expropriation • •War • •Civil Insurrection • •Currency Inconvertibility

Political Risk Analysis

•Non-Systematic Methods (i.e., "Grand Tours") • •Subjective Macro Methods (i.e., BERI Index) • •Consultants (i.e., Kissinger and Associates, Control Risks etc.) • •In-House Political Risk Staff (i.e., Major Global Banks and Global Manufacturing Companies)

History of U.S. Political Risk Experience

•Soviet Russia 1918: $3.5 Billion ($175million U.S.) •Mexico 1927-38: Land & Oil Properties $31.5 million •World War II to 1959: Yugoslavia, Poland, Czechoslovakia, Bulgaria, Hungary, Rumania •Cuba - 1959: ($1.5 billion) •Latin America: 1960- 1980 • •Iran: 1979-1980 ($7 billion)

►To facilitate comparison between companies on Sustainability Measures and provide a Sustainability Reporting Framework, the Coalition for Environmentally Responsible Economies (CERES) founded:

► the Global Reporting Initiative (GRI) in the 1990s. ► ►Over 3,500 companies prepare and publish sustainability reports that follow GRI Standards. Most companies prepare reports voluntarily; however, some companies are required to report. ► ►Similar to accounting standards, the GRI framework rests on concepts of consistency, comparability, objectivity and verifiability.

Evolution of Reporting on Sustainability

►In the 1960s and 1970s, Socially Responsible Investing became very important. In response, many companies published environmental reports. ►In the 1980s and 1990s, a greater awareness about environmental impacts was occurring and exposing what was called global warming and finally climate change. ► ►Environmental reports evolved into Environmental, Health and Safety Reports. ►Additional concepts around sustainability performance also evolved and began to be discussed as the Triple Bottom Line (TBL) ►In terms of accountability, the internet also made it easy for stakeholders to research company performance and more importantly, to share experiences and hold companies accountable. ►Many notable business leaders in the area of strategy and sustainability have suggested that listening to Stakeholders and embracing their preferences and imperatives should be part of every business model.

Sustainability and the Role of the Professional Accountant

►Sustainability touches all functions within an organization and is growing in importance. One of the key challenges today with advancing a sustainability strategy is integration across all operational disciplines, including information systems, supply chain, production, marketing and finance. ►Therefore, it is essential for individuals entering the accounting profession to fully understand sustainability and the corresponding business implications so these individuals can have successful careers and make a positive impact.

Triple Bottom Line (TBL)

►The TBL expects that companies should measure Social and Environmental performance in addition to Economic performance. ► ►This results in a company's responsibility to report to its Stakeholders rather than just its Shareholders. ► ►Each of these performance categories or pillars of sustainability (Social, Environmental and Economic, or SEE) are often referred to as "the three P's," or People, Planet and Profit.

Business Case for Sustainability and Sustainability Reporting

►The business reasons for sustainability reporting are extensive and are ultimately based upon what would influence Stakeholder value and not just Shareholder value. Stakeholders can be both internal and external to the organization and might include the following groups: ►Investors ►Suppliers ►Government legislators at the national, state and local levels ►Non-governmental organization (NGO) such as Ceres, IIRC or CDP ►Industry associations ►The community at large, including customers, consumers, activist groups, researchers and the media, etc. ►Employees and employee groups such as unions.

The mission of the IIRC

►to create a globally accepted integrated reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. ► ►The aim is to help with the development of more comprehensive and comprehensible information about organizations, prospective as well as retrospective, to meet the needs of a more sustainable, global economy."