International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black Chapter 1...

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Chapter 1

International Accounting

and

International Business


National Differences in Accounting Standards

Many different systems throughout the world Reconciliation is still a challenge

Accounting systems Evolve Reflect the environments they serve

Development of accounting influenced by Educational, Legal & Political systems Sociocultural characteristics

Moving toward uniformity of Acctg. Standards Why do you feel uniformity is important?


Reasons for International Involvement

Expand sales Excess capacity Greater profit potential

Gain access to Raw materials Other factors of production (cheap labor) Knowledge New developments in technology


Forms of International Involvement Exports and imports of goods and services Strategic alliances

Licensing agreement (intangible property) Intangible property: production process, formula, design, patent,

invention Firms earn a return on the intellectual property without having the

take risk of expanding abroad using capital Franchise agreement (Holiday Inn, McDonald’s)

Use of trademark with brand name recognition Investment abroad

Direct investment – companies acquire degree of control of foreign corporation to influence management decisions

Joint venture- two or more firms involved in establishing a venture.


Multinational Enterprises

Possess a worldwide view of Production Sourcing of raw materials and components Final markets

Elite MNE Generally no less than10% of a company’s overall

assets, earnings, and employees are abroad Significant geographical spread International experience of executives


Multinational Enterprises

Small companies (esp high tech firms) Export and import Manufacture products abroad or outsource

production (Accounting firms with India?) Licensing agreements.

Firm Size and Saturation of Domestic Market

Probability of International Transactions


Large Multinational Enterprises

Top 10 Companies by Market Value in 2004

Source: Business Week Global 1000Rank

Name CountryMarket Value

2004 2003 ($ Billions)

1 1 General Electric U.S. 328.11

2 2 Microsoft U.S. 284.43

3 3 Exxon Mobil U.S. 283.61

4 4 Pfizer U.S. 269.66

5 5 Wal-Mart Stores U.S. 241.19

6 6 Citigroup U.S. 239.43

7 9 BP Britain 193.05

8 10 American International Group U.S. 191.18

9 13 Intel U.S. 184.66

10 8 Royal Dutch Petroleum Netherlands 174.83


Large Multinational Enterprises

Top 10 Companies by Sales in 2003

Source: Fortune Global 500Rank

Name CountrySales

2003 2002 ($ Billions)

1 1 Wal-Mart Stores U.S. 263.00

2 5 BP Britain 232.57

3 3 Exxon Mobil U.S. 222.88

4 4 Royal/Dutch Shell Group Britain/Neth. 201.73

5 2 General Motors U.S. 195.32

6 6 Ford Motor U.S. 164.51

7 7 DaimlerChrysler Germany 156.60

8 8 Toyota Motor Japan 153.11

9 9 General Electric U.S. 134.18

10 14 Total France 118.44


Deciding to Become Global Assessment of

External environment Internal capabilities of the firm

Environmental constraints Educational: literacy, access to specialized/higher education:

attitude toward education / quality Sociocultural: attitude toward managers/authority,

interorganizational cooperation, attitude toward success, class structure, attitude toward wealth, risk

political and legal: legal rules, stability, foreign policy Economic: International trade patterns, financial organization Country-specific advantages (cheap materials, labor)

Firm-specific advantages – intangible assets


Environmental Influences on Accounting Enterprise ownership – need for public accountability/disclosure

Broad ownership State ownership Family ownership

Business activities influence the nature of the accounting system Sources of finance and pressure for accountability

External shareholders Banks Family sources

Taxation Accounting systems influenced by state objectives (France) Accounting systems separate from state objectives (U.S.)


Environmental Influences on Accounting

Developed accounting profession – presence of Big four and other international firms Judgmentally based accounting systems Depends upon accounting education and

research Political system – accounting system reflects

political philosophy Social climate – attitude of informing

employees /level of employee awareness


Environmental Influences on Accounting

Economic growth and development – uniformity toward treatment of intangibles etc.

Inflation leads to alternative approaches such as deviation from historical cost principles

Legal system and regulation of accounting Civil codes (France and Germany) Common law (U.S. and U.K.) – Post SARBOX

Culture (societal or national values) International factors

Colonial influence – use methods of relative countries Membership in Regional trade blocs (European Union)


Accounting Standards and Traditions

International Accounting Standards Board Works for convergence

Former socialist economies are adjusting Russia and Eastern Europe – making transition to market

approach

British and continental European traditions are now being coordinated


Major Development Factors Corporations recognized as legal entities with limited liability

Why was limited liability important for developing accounting rules? – Need for transparency

Protects shareholders and creditors – esp publicly traded corporations Other factors of a corporate entity?

Professional management Separation of ownership v. control – possible lack of goal congruence Less of an issue in family owned businesses / closely helds A point of controversy

Emergence of securities markets Raises capital for corporations to expand operations Fundamental element of the transition to a market economy Shows need to attract foreign investment – such GAAP issues as

comparability, going concern, transparency Broadened disclosure – Increased importance of financial analysts. Fundamental to emerging markets such as China, Eastern Europe, Latin

America


Corporate Disclosure

Disclosure/access to detailed financial data to finance providers can be seen as a spectrum Least disclosure – shareholders and investors –

Shareholder control myth- so SH really control the entity. Varied disclosure – depends on the purpose of the

disclosure and the power of the finance provider Accounting disclosure

Used as a means of national economic planning and control (Examples – France and Sweden)

Accounting professionals Played a key role in developing accounting systems

(Examples – U.S. and U.K.)


Trends in Securities Markets

Strong move to attract foreign companies to list on exchanges 2004 – trading volume of non-U.S. firms listed on

NYSE was 10.5% of the Exchange’s total trading volume

Consolidation of European exchanges Exchanges in developing countries are

growing


A Wider Audience

Increased disclosure to other groups Employees, trade unions, consumers,

government agencies, and the general public Investment decisions

Expectations of nonfinance providers Not clearly defined Techniques to measure them do not exist

Less developed countries have less accountability and disclosure


Accountability and Multinational Enterprises

Demand for greater disclosure by the host country can be a bargaining tool -

MNE view Just a part of global operations Some MNEs have acted in ways detrimental to a

host country – Tax Avoidance/evasion / Political Interference/Discriminatory Practices

Host country’s view Business activities of an MNE are of primary

concern – Why? How does host country benefit?


Accountability and Multinational Enterprises

Domestic Corporations Primary operations in one country Cross-frontier relationships with unrelated parties

Multinational Enterprises Operate in many countries with different laws and

currencies Significant volume of transactions between units

located in different countries Provides opportunities to coordinate prices –

transfer pricing rules…hot button for U.S. Tax


Accounting Aspects of International Business -Evolution

Exposure to International Accounting First Exposure: Importing or exporting

Letters of credit / Customs regulations / Financial statements (translation / interpretation) if not listed in Standard/Poors international credit ratings

Costs of outside expertise Increase with increased trade Should develop in-house experts Separate organization to handle international trade

Possible Establishment of a foreign unit or even a wholly owned subsidiary – new issues relating to foreign presence and adherence to foreign rules (accounting and otherwise)

Awareness of international market conditions Lower cost of capital


The Field of International Accounting Descriptive/comparative accounting

Important issues Forces and conditions that create international differences

Trend toward convergence International transactions/multinational enterprises

Important issues Financial reporting problems Translation of foreign currency financial statements, Information systems Budgets and performance evaluation Audits Taxes

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black Chapter 1...

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