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International Accounting
and Finance
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OHT 11.2
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Objective
Discuss the background to accounting and its two main divisions;
Identify the main users of accounting information and the keyfinancial statements;
Outline the differences of accounting treatment followed byvarious countries;
Assess the need for international harmonisation of accountingpractices;
Examine some key issues facing a firm in the management of international firms and when operating under different financialand fiscal regimes;
Identify some of the financial instruments used in finance of foreign trade.
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OHT 11.3
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Background to Accounting
What is accounting?
Identifying the key financial components of anorganisation
Measuring the monetary values of the keyfinancial components
Communicating the financial information
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OHT 11.4
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Users of accounting
information Investors
Lenders
Suppliers and other creditors
Employees
Customers
Government and its agencies The public
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OHT 11.5
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Major Financial Accounting
Statements The profit and loss account (or Statement of
Income)
The balance sheet The cash flow statement
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OHT 11.6
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Published Accounts
Large corporations will publish financialinformation, usually as a requirement of a specificstock exchange or due to national legislation
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OHT 11.7
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Extract 1: Rover trouble was
unavoidable(Losses in
brackets)
Rover Net
Profit using
Br a/c rules
£m
Rover Net
Profit using
Gr a/c rules
£m
Difference £m
1994 279 Unpublished -
1995 (51) (163) -112
1996 (100) (109) -9
1997 19 (91) -72
Total 147 (363) -216
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OHT 11.8
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Extract 2: UK standards add £200m to BA results
(Losses in
brackets)
BA Net Profit
using Br a/c
rules £m
BA Net Profit
using Gr a/c
rules £m
Difference £m
1994 274 145 -129
1995 250 297 +47
1996 473 267 -206
1997 553 548 -5
1998 460 654 +194
Total 2,010 1,911 -99
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OHT 11.9
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Reasons for different
accounting standards The legal system
Types of ownership patterns
The accounting profession
Conservatism
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OHT 11.10
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Global Accounting Standards
The International Accounting Standards Board (IASB)
Sarbanes–Oxley Act 2002 in US
Which company does the act apply to?
Do chief executives have to swear the truth of theircompany accounts?
What if the accounts are later proven to be wrong?
When does the act come into force?
What will it mean for more junior executives?
What else should companies look out for?
Is there any chance UK and other businesses may escapethis provision?
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OHT 11.11
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Higgs Committee Report
(2002)Sought to improve corporate governance in the UK byrecommending that:
At least 50% of a company’s board should consist of
independent non-executive directors Rigorous, formal and transparent procedures should
be adopted when recruiting new directors to a board
Roles of Chairman and Chief Executive of a company
should be separate No individual should be appointed to a second
chairmanship of a FTSE 100 company
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OHT 11.12
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Integration of ways to manage risk
Source: Lisa Meulbrook, Financial Times, 9 May 2000.
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OHT 11.13
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Strategic Risk Management
Methods of implementing such a policyinclude: Modifying the company’s operations
Adjusting the company’s capital structure
Employing targeted financial instruments
Combining the above 3 methods to minimise theaggregate net exposure to risk from all sources
Alternative risk transfer (ART)
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OHT 11.14
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Financial Instruments and
Trade Bills of Exchange
‘Avalised’ Bills of Exchange
Forfaiting
Letters of Credit
Factoring
Invoice Discounting
Securitisation
Options, Futures and Swaps
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OHT 11.15
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Centralised Financial
Management Reasons in favour:
Minimising cost/maximising return
Flexibility
Scale economies
Professional expertise
Synchronisation
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OHT 11.16
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Decentralised Financial
Management Reasons in favour:
Generality
Motivation and morale
Conflicts
Inflexibility
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OHT 11.17
Wall and Rees: International Business, 2nd edition © Pearson Education Limited 2004
Transfer pricing
Scenario 1 Scenario 2
$m Country A
CountryB
Country A
CountryB
Costs
Sales
Profit
Tax liability
40
50
10
2.5
90
100
10
5
40
60
20
5
100
100
0
0
Total tax 7.5 5