REFLECTION PAPER

BA 233N- INTERNATIONAL FINANCE

REPORT 3: INTERNATIONAL FINANCIAL TRANSACTIONS

Submitted by:
Reizel Joy L. Macario
MBM-Finance-2nd year

Submitted to:
Prof. Kerby Salise
 International Financial Transactions
Content
An international transaction is a cross-border trade agreement or a credit
operation that requires settlement in a foreign currency. In the chronology of a typical
international transaction involving the exchange of goods or services, the settlement date
is the last stage. It is preceded by other stages, such as forecasting, pricing, contracting
(SO/PO, sales order/payment order) and recording (AR/AP, accounts receivable/payable).
It refers to the transactions between two or more associated enterprises, where at least
one of the parties is a non-resident.

Relevance in Transfer Pricing

The concept of international transactions hold particular significance with regard to the
issue of the Transfer Pricing Regulations; knowing that a transaction falls under the ambit
of Transfer Pricing Regulations if it is classified as International Transaction, Deemed
International Transaction or Specified Domestic Transaction performed between
Associated Enterprises with fall within the ambit of taxability.

Taxpayers should note that transfer pricing is the name which is bestowed upon the
techniques and methodologies of implementation for pricing transactions within and
between enterprises which are falling under common ownership or control.

Capital Financing Transactions

Transactions Covering Business Restructuring/Reorganization
Business restructuring/reorganization could be in the form of:

• Organizational change – change in the ownership structure or management of the

group entities.
• Operational change – change in the functional, asset and risk profile of the group
entities.

Types of Financial Transactions

1. Sales- are financial transactions that legally transfer property for money or credit.
Sales are a part of revenue that is earned by the business when goods are delivered
or when services have been rendered to customer. Sales financial transactions
 made by extending credit to the customers would be recorded as accounts
receivables.
2. Purchases- are financial transactions that involve the business obtaining the goods
or services necessary to make sales. Purchases may be made with cash or using
accounts provided by the supplier of the goods or services. This financial transaction
is recorded in the accounts payable of the business.
3. Receipts- are the financial transactions caused by the business getting paid for
supplying goods or services to another business.
4. Payments- are the financial transactions that refer to a business paying to another
business for receiving goods or services.

The main international payment methods used around the world today include:

1. Cash in Advance- the buyer completes the payment and pays the seller in full
before the merchandise is delivered and shipped off to the buyer.

This is generally a recommended option for sellers who are dealing with new buyers or
buyers with weak credit ratings, and/or for high-value products.

Other cash in advance methods include:

• Debit card payment

• Telegraphic transfer
• International cheque

Cash Advance pros and Cons

Pros Cons
Buyer Minimal Risk of not receiving
shipment or receiving
damaged shipment
Unfavorable cash flow
Seller Secure full payment Risk of losing business to
before shipment competitors if offering
this as the only accepted
No risk of non-payment international payment
method
 2. Letters of Credit

With a Letter of Credit, payment is made through both the buyer and sellers’ banks.
Upon confirmation of trade terms and conditions, the buyer instructs his bank to pay the
agreed-upon sum by both parties to the seller’s bank. It is also known as, LC.

LC Pros and Cons

Pros Cons
Buyer Guarantee of cargo being Reliance on seller to ship
shipped before payment goods as specified

Obligation by seller to
fulfill stated and
negotiated conditions
Seller Reliable proof of foreign Minimal
buyers’ credit prior to
shipment of goods

Obligation by buyer to
fulfill stated and
negotiated conditions

Payment by buyer’s bank

in the event of a default

Low risk

3. Documentary Collections

Documentary collections is a process in which both the buyer’s and seller’s banks act as
facilitators of the trade. With documentary collections, also known as Bills of Exchange,
the seller is basically handing over the responsibility of payment collection to his bank.
 Documentary Pros and Cons

Pros Cons
Buyer More economical than Reliance on seller to ship
Letters of Credit goods as specified
Seller Minimal No verification involved

No guarantee of payment
from bank

No protection against
cancellations

4. Open Account

Under Open Accounts (also known as Accounts Payable), merchandise are shipped
and delivered prior to payment, proving to be an extremely attractive option for
buyers especially in terms of cash flow. On the other end of the spectrum, however,
sellers are faced with high risks.

With this payment option, the seller ships the goods to the buyers with a credit
period attached. This is usually in 30-, 60-, or 90-day periods, during which the buyer
must carry out full payment.

Open Account Pros and Cons

Pros Cons
Buyer Receives goods before Minimal
payment is due

Positive cash flow

Seller Can attract customers in High risk of default
competitive markets
 5. Consignment

The consignment process is similar to that of an open account whereby payment is

only completed after the receipt of merchandise by the buyer.

The difference lies in the point of payment. With consignment, the foreign buyer is
only obliged to fulfill payment after having sold the merchandise to the end
consumer. Consignment is usually only recommended for buyers and sellers with a
trusting relationship or reputable distributors and providers.

Consignment Pros and Cons

Pros Cons
Buyer Payment is due only after May have large inventory
final sale of goods to end to manage
consumer
Minimal
Quick receipt of goods
Seller Lower storage fees Payment not guaranteed
until end sale
Less inventory
management Lack of access to and
management of
More competitive merchandise

Reporter

As for the reporter, she discusses the report well and the discussion was also
supplemented by our professor and insights coming from our classmates, as well.

Self-Learning

Since I am studying Financial Management, I must know the terminologies used in financial
accounting. Thus, financial transaction in accounting is an event that impacts on the
monetary value of an asset, a liability, or the owner’s equity of a business and causes it to
change.

It is characterized by the monetary impact on the financial statements of the business

created in an accounting register called journals. An event that does not impact on the
business financially or monetarily is not recorded in the journals. So, the question is that.,
“What is the purpose of this?”

Business stakeholders like managers, investors and funders need relevant and timely
information to help them make financial decisions about the business resources under
their control.

In accounting, this information is supplied by financial reports that inform stakeholders of

the current financial position and performance of the business. By recording financial
transactions that impact on the assets, liabilities and owners’ equity of a business,
stakeholders can stay constantly informed of the changes taking place in the financial
position and performance of the business.

References:

1. Reporter’s PPT and discussion.

2. https://www.investopedia.com
3. https://www.icontainers.com/help/international-payment-methods/
4. https://link.springer.com/book/10.1057/9781137356932