chapter 20instruction2.mtsac.edu/rjagodka/.../chap020_accounting_finance.pdf · variables...
TRANSCRIPT
Miscommunications
Miscommunications Many forms Video brief Miscommunications
Miscommunications in global accounting Different standards (reporting) Different languages (currencies) Different regulations (taxes)
Country Differences In Accounting Standards
Accounting systems evolve Respond to demand for accounting information
Difficult to harmonize across countries One study found that among 22 countries: 76 ways to assess the cost of goods sold 65 differences in calculating return on assets 20 ways to calculate net profits Different ways to count
Challenge to compare financial performance of firms from different countries
Variables Influencing Accounting Standards
Relationships
Country Ties
Inflation
Econ Development
External Capital Which source is most important? Investors important -
(US/UK) Banks important –
(Swiss, Germany, Japan) Government important –
(France/Sweden) Culture
Variables Influencing Accounting Standards
Relationships
Country Ties
Inflation
Econ Development
Political/economic ties can create accounting similarities US influences systems in
Canada and Mexico EU countries are moving
toward common systems
Culture
Variables Influencing Accounting Standards
Relationships
Country Ties
Inflation
Econ Development
Historic Cost Principle Assumes that the currency
is NOT losing its value due to inflation
Inflation affects asset valuation If high inflation
assets may be undervalued If very low inflation
assets may be overvalued Culture
Variables Influencing Accounting Standards
Relationships
Country Ties
Inflation
Econ Development
Developed nations More sophisticated
accounting systems Developing nations Inherited accounting
systems from former colonial powers
Culture
Variables Influencing Accounting Standards
Relationships
Country Ties
Inflation
Econ Development
Uncertainty Avoidance If High Uncertainty Avoidance Need for rules / regulations Tightly controlled (gov’t) Japan, Mexico If Low Uncertainty Avoidance Readiness to take risks Strong auditing professions
- Many companies do not follow the rules
UK, US, Sweden Culture
International Standards
International Accounting Standards Board (IFRS Standards) Has 45 standards - compliance is voluntary 140 of 150 countries have made a public
commitment supporting a single set of high quality global accounting standards. Albania, Belize, Bermuda, Cayman Islands,
Egypt, Macao, Paraguay, Suriname, Switzerland and Vietnam have not.
Consolidated Statements
Combine separate financial statements (two or more companies) to yield single set of financial statements (as if the individual companies were really one)
• Used by MNEs
Intra Firm Trade is HUGE Intra firm = Company imports/exports to itself, internationally
Over 50% of U.S. imports were intrafirm (2009)
Much variation: By Country • 74% of U.S. imports from Japan were intrafirm (2000) • 2% of U.S. imports from Bangladesh By Product Category • 70%+ of U.S. imports of autos, medical equipment and
instruments. • 2% of U.S. imports of rubber and plastic footwear
Many CFOs contend that U.S. tax policy conspires against a manufacturing renaissance. The country's high corporate income tax rate - highest in the world - has prompted U.S. companies to reinvest overseas much of the money they earn there, rather than repatriate it (bring it back to the U.S.)
John Chambers, CEO of $40 billion computer networking company Cisco Systems, recently said that if his company could bring home the roughly $30 billion it holds in foreign countries without suffering onerous tax consequences, the company would boost hiring in the United States by 10%.
Source: CFO Magazine
Intra Firm Trade, Taxes, & Cash
Taxes The U.S. taxes the foreign income of their firms These taxes can be deferred until earnings
are repatriated Result - U.S. MNEs have incentive to retain
earnings abroad Firms hold most of these funds in cash
Why so much cash overseas?
US Firm Cash Holdings Abroad = $1.4 trillion (11/2017)
Intra Firm Trade, Taxes, & Cash
https://www.marketwatch.com - Nov 22, 2017
But most of that cash is held overseas, and the company would have to pay 35% corporate income tax to bring it back to the US for its shareholders.
Instead, the company is borrowing $17 billion and paying interest of around $300 million a year.
Plus, the company can deduct interest expenses from its taxes, so it will effectively pay about one-third less, or closer to $200 million per year.
The decision allows Apple to avoid around $8 billion in taxes (probably less) from bringing back $17 billion from abroad to pay investors.
Apple’s Cash Hoard Overseas … Apple’s cash – Q4, 2016 Source: CNBC.com
UPDATE: NOVEMBER 2017 APPLE’S CASH OVERSEAS NOW AT $268 BILLION
Transfer Pricing
Benefit by manipulating prices of intra-MNE transactions Benefits include: Tax reduction Import Duty (tariff) reduction Foreign exchange controls Profit increase (if required by
joint ventures)
Transfer Pricing & Performance Evaluation
Transfer prices are designed to maximize profitability and currency flows,
But they make an unbiased performance evaluation nearly impossible.
Firms may establish transfer prices because of: differences in national tax rates tough competition in foreign markets anti-dumping legislation
Internal transfer prices may also include the allocation of fixed costs, loans, fees, royalties, and other factors.
Example – ABC Company
Must comply with the “arm’s length principle”
Japan - Subsidiary High tax 32.1% Stable currency
Free funds movement
China – Joint Venture Low tax 25%
JV Profit pressures Stable currency Blocked funds
ABC Corporation (USA) High tax 39.1% Stable currency
Free funds movement
Under-price or Over-price components
from Japan to China JV?
Under-price or Over-price finished goods
from China JV to U.S.?
1
2
Arm’s Length Principle
Current open market prices Comparable open market prices
Gross margin prices Acceptable range of gross margins achieved
in comparable transactions between independent companies
Operating profit methods Comparing period percentage operating profit
or comparing operating profit on transactions rather than on a whole-company basis
Any Reasonable Means
Scenario – ABC Company
Assuming that we comply with “Arm’s Length” What are the Pros and Cons of this approach?
Japan - Subsidiary High tax 32.1% Stable currency
Free funds movement
China – Joint Venture Low tax 25%
JV Profit pressures Stable currency Blocked funds
ABC Corporation (USA) High tax 39.1% Stable currency
Free funds movement
Underpriced our components from Japan to China JV.
Overpriced our finished goods
from China JV to U.S.
1
2
Transfer Pricing Scenario
If under price exports from Japan subsidiary to China Tax savings (Japan [High tax] to China [Low tax]) Little exchange risk Can repatriate funds quickly (but earn less in Japan)
If over price exports from China JV to USA Pay lower tax (on less profit) in high tax country (USA) Little exchange risk Need to Repatriate funds from China – later can alter transfer price U.S. market may get high prices -> price escalation U.S. duty rates may be based on higher rate
Transfer Pricing Objectives
We need to identify company objectives: Where do we need access to funds? Where do we need to minimize tax liability? Where do we need to maximize profits? Where is price competition the most important?
Financial Management
Investment Decisions
Financing Decisions
Money Management Decisions
Capital Budgeting Estimating the cash flows
associated with the project over time, then discount them to determine (NPV) net present value Adjust for political risk Economic risk - inflation
Financial Management
Investment Decisions
Financing Decisions
Money Management Decisions
Source of Financing Global capital markets Cost of capital usually lowest Government may require local
sources to be used Local debt markets If expect currency depreciation
then use local debt sources Structure (debt vs equity) Norms vary by country Local norms or home country? Minimize cost of capital
Financial Management
Investment Decisions
Financing Decisions
Money Management Decisions
Minimize cash balances Invest cash reserves Short term get lower interest
Gains liquidity Long term get higher interest
Low liquidity
Reduce transaction costs Every time cash is changed
from one currency to another Multilateral netting (next slide)
reduces the number of transactions
Reduces transaction fees
Multilateral Netting Cash Flow with 5 subsidiaries ($ millions) – NEED TO SIMPLIFY
Germany
China
Japan Brazil
UK
$2 $3
$3 $2
$7 $5
$1 $4
$3 $4
$3 $6
Transaction Costs (1%) - Currency exchange - Transfer fees Total Transfers $75 million Total Costs $750,000.00
How to do it?
Korea China Japan Taiwan
Multilateral Netting Reduce transactions (and fees for transfers) among subsidiaries
SIMPLIFY IT ALL
1. Look at payments out from each, and total them(total for each column in matrix)
2. Look at receipts for each, and total them(total for each row in matrix)
3. Subtract payments from receipts to determine theextent of net receipts (+) or payments (-)
Develop a matrix – shows all payments (columns) and receipts (rows)
4. Look at the negative numbers to determine whopays what to whom