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International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Chapter 1
International Accounting
and
International Business
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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?
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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.
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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.)
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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)
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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.)
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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?
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
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
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