 Oh, and welcome to the session. This is Professor Farhad, and this session we would look at what is international accounting. International accounting is a topic that's covered, and obviously in an international accounting course, as well as the CPA exam. Before we start, I would like to always remind my viewers, which is you, if you're new, to connect with me on LinkedIn. If you don't have a LinkedIn account, you should create one. It's very good for your professional image and for networking as well. YouTube, please subscribe to my YouTube. If you like my YouTube, please like them, put them in playlists, share them with others. Let the world know about them. If you're benefiting from my YouTube, then there's somebody else out there who would benefit. Please follow me on Instagram as I'm an increasing my Instagram followers and like my Facebook page. If you want CPA premium material, go to my Gumroad account, Farhad Lectures on Gumroad, or you can visit my website for additional lectures. So we're going to start by discussing what is international accounting. What is this topic? Because just an overview. What could you do? Well, obviously it's an accounting topic. So it's include the study of areas of accounting, functional accounting. But specifically international accounting focuses on the accounting issues that are unique to multinational corporations, corporations that operate in multiple international countries and multiple jurisdiction. And specifically, if you want to summarize international accounting, we have to deal with two things. We have to deal with international transactions and foreign investments. And those two topics, they have many sub topics, but this is basically what it is. It's either you buy and sell in the international market, I'm sorry, you buy and sell it or buy or sell. It doesn't matter whether you buy or you sell, or you might also have direct foreign investments where you take your money and you either start an operation or you buy an existing company in a foreign country. So those are the two main issues that we have to deal with when it comes to international accounting. So international accounting as a field can be defined at three different levels. The first level is the general level, and this is where you study the guidelines and the standard and the rules of accounting, auditing and taxation within or across countries. So basically what you're doing here is comparative analysis across different jurisdiction. And in this course, I will cover those topics. For example, how would the US trade property, plant and equipment versus Europe? How would the European companies that they're using the IFRS trade property, plant and equipment? What about inventory? So on and so forth. So this is basically a comparative analysis. It's called comparative analysis. Or you could look at a second level, which is supranational accounting. And here you are looking at the standard guidelines and rules issued by supranational organization, such as the International Accounting Standard Board, IASB, or the IFAC, which is the International Federation of Accountants, or you're looking at the organization for economic corporation and development. Okay. So basically in the US, you would look at FASB and you would look at GAAP. Also what you can do, you can study the organizations that sets the rules for international accounting. They're called supranational organizations. That's another way to look at international accounting, the study of international accounting, or that's another level of it. And the third level is basically a company level. Here you are dealing with accounting specifically related to international business activities and foreign investments. Remember international transactions and foreign investments. The third level is to actually dig into the company level. And what is the company doing on a day-to-day basis? And how does that affect their operation in terms of transfer pricing, you know, when they sell, when the US company sells to its subsidiaries in Japan, how do they set up the prices between the two entities, tax rules specific to the corporation, foreign currency transactions, technique for evaluating foreign operation. We're also going to look at this topic much more in details. So we'll look at level two very briefly. We'll look at level one and level three in this course throughout the course, much, much more in detail. So let's just give you a feeling, or not a feeling, basically a taste of what international business or international accounting would involve. So we're going to take a look at, so let's go ahead and let's work an example just to wet your feet to kind of show you how international accounting start. So the first encounter with international business usually occur when a company sells or buy, sells to a customer or buy from a foreign supplier. So basically you buy and you sell something and you're going to settle the transaction in the foreign currency. So let's take a look at a sale. Let's assume you sold to a foreign company. So credit sales are made to a foreign customer who'll pay in their own currency. So when you sell to a customer, the customer might say, I'm willing to buy, but I'm only willing to pay you in my foreign currency. I'm not going to pay you US dollar. Now bear in mind, I always assume that the home country is the US. Well that's fine. We gain a sale that's okay, but what's going to happen? The sales going to give us a rise to an exchange risk. What is that risk? We're going to talk about the risk later. We're going to show you what the risk is. So let's look at an example to illustrate this. It's just going to wet your feet to show you what's going to be coming up the down the road. Suppose on February 1st, Magnum, a US company makes a sale and ships goods to NMUK, a UK company, a bridge company for 100 pound sterling pound. Now we made the sale on February 5th, but we agreed that we will be paid in pound on March 2nd. And the exchange rate as of February 1st is for each one UK pound we would receive today, dollar 35. Today is February 1st. However, we're not going to be getting this money now, we're going to be getting this money March 2nd. And who knows what's going to happen between now and March 2nd. Especially nowadays, if you're selling to a UK company, there's a lot of risk because of the Brexit, they really don't know what's going on. It's still work and process as of the beginning of summer of 2019. So what do we have to do? What entry do we book as a US company? As a US company, we have to go what we have today. As of today, February 1st, we expect to receive 100 pounds, 100 sterling, and we can convert them today, dollar 35. Therefore we expect to receive 135 US dollars. So we debit account receivable 135, we credit sales revenue 135. Now this is today, this is basically think of this transaction as we hope we're going to get 135, because we don't know what's going to happen by March 2nd and this is where the risk lies. So let's see what happened March 2nd. Suppose on March 2nd, the exchange rate for each one sterling, we're going to get dollar 30. What happened is the US dollar strengthened, the US dollar strengthened. Now we're going to be getting the 100 pounds. That's good. We're going to go to the bank and convert it at dollar 30. So the pound only buy a dollar 30 US dollars. Well guess what? We're going to debit cash 130,000 dollars. Now remember, we have an account receivable for 135, let me show you. See we have a receivable for 135, therefore we debit at cash 130. But since they paid us, we have to remove the receivable for 135. Although they paid us 130, the receivable has to go down to zero. We cannot tell them, well we owe us 135, they only promise to pay 100,000. Therefore we have to remove the receivable for 135. Well what happened is this between February 1st and March 2nd, the US dollar strengthened. As a result, we are worse off. Because we have a receivable in our home currency strengthened, now what's going to happen? The foreign currency will buy us less home currency. The opposite, if we are buying from the British company, if we are buying then we would have been better off if our currency strengthened. Since we are selling and we have a receivable, since our home currency strengthened, what's going to happen? The difference is a loss. Basically it's a loss on foreign exchange specifically for 5000 dollars. And this is where the risk lies. Because the market fluctuates and as a result, I'm exposed to that foreign currency, I'm exposed to that risk, I could have a loss. Now bear in mind also that if the US dollar weakened, let's assume one pound will give you $1.40, rather than $1.30, let's assume on March 2nd you have $1.40. Guess what we have here? Your cash flow, your cash flow, your cash flow, your cash flow, your cash flow your cash would have been $140,000, your receivable would have been $135,000 and you would have a gain of $5,000 for gain on foreign exchange. But companies don't like to take that risk. They're not interested in playing the foreign currency market. That's not what they do. The company sells tires, they sell telephones, whatever they sell. That's their business. They're not interested in that risk. So what do they have to do then? They have to hedge. They have to protect themselves from that type of risk. So what can they do, techniques to manage exposure, and this is what we'll talk about much, much more down the road, is foreign currency options. It gives us the right, not the obligation, to sell foreign currency to at a predetermined exchange rate at end time. So for example, if we have this receivable, we could have bought a foreign currency option, and that option will tell us, for example, that option would guarantee that we will sell the UK pound, that we'll be receiving $1.35. But we have to pay a fee for that. We will pay a fee, for example, $300 in this way by paying a fee to someone that someone would guarantee that at any time, for a specific period of time, I will buy from you UK pound for $1.35. Or we can buy a forward contract. The forward contract are different. The forward contract are obligation to exchange foreign currency at a future date. Obligations means you have to. Rights means if you decided to do it, you can do it. Now, those are techniques. Both of these techniques we're going to be covering much, much more in details later down the road. This is just to wet your feet about foreign currency risk, foreign exchange risk. What type of risk do companies have to deal with when they sell or buy from a foreign market or when they operate in a foreign market? So this is basically it in the next session. I would look at foreign direct investments. Why do companies have foreign direct investments? So if you were in my class, make sure to read the book. If you are taking this course somewhere else, make sure to read the book as well. Do your homework, study hard. If you're studying for your CPA exam, study well. It's worth it. Good luck.