Why do the accounting systems of different countries differ? Why do these differences matter? (Please refer to Ch 20 to complete this task) ? Sub
- Why do the accounting systems of different countries differ?
- Why do these differences matter? (Please refer to Ch 20 to complete this task)
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Accounting and Finance in the International Business
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Learning Objectives 1 of 2
LO 20-1 Discuss the national differences in accounting standards.
LO 20-2 Explain the implications of the rise of international accounting standards.
LO 20-3 Explain how accounting systems affect control systems within the multinational enterprise.
LO 20-4 Discuss how operating in different nations affects investment decisions within the multinational enterprise.
Learning Objectives 2 of 2
LO 20-5 Discuss the different financing options available to the foreign subsidiary of a multinational enterprise.
LO 20-6 Understand how money management in the international business can be used to minimize cash balances, transaction costs, and taxation.
LO 20-7 Understand the basic techniques for global money management.
“The language of business”
Profit and loss statements, balance sheets, budgets, investment analysis, and tax analysis
Investment decisions: decisions about what activities to finance
Financing decisions: decisions about how to finance those activities
Money management decisions: decisions about how to manage the firm’s financial resources most efficiently
National Differences in Accounting Standards
Learning Objective 20-1 Discuss the national differences in accounting standards.
Rules for preparing financial statements
Define what is useful accounting information
Specify the rules for performing an audit
National differences in accounting and auditing standards can make it difficult to compare financial reports from one country to another
Accounting standards are rules for preparing financial statements.
Auditing standards are rules for performing an audit.
International Accounting Standards 1 of 2
Learning Objective 20-2 Explain the implications of the rise of international accounting standards.
Global providers of capital are demanding consistency in reporting of financial results.
Adoption of common accounting standards will facilitate the development of global capital markets.
International Accounting Standards 2 of 2
International Accounting Standards Board (IASB)
International Financial Reporting Standards (IFRS)
Compliance is voluntary
May replace GAAP in the U.S.
Mandated harmonization of accounting principles of member states
Accounting Aspects of Control Systems 1 of 5
Learning Objective 20-3 Explain how accounting systems affect control systems within the multinational enterprise.
Head office and subunit management jointly determine subunit goals for the coming year.
Throughout the year, the head office monitors subunit performance against the agreed goals .
If a subunit fails to achieve its goals, the head office intervenes in the subunit to learn why the shortfall occurred, taking corrective action when appropriate.
Accounting Aspects of Control Systems 2 of 5
Accounting Process Assumes a Critical Role
Subsidiaries’ profits and ROI
Accounting Aspects of Control Systems 3 of 5
Exchange Rate Changes and Control Systems
The Lessard-Lorange Model
Three exchange rates that can be used to translate foreign currencies into the corporate currency
Internal forward rate
Internal forward rate refers to a company-generated forecast of future spot rates.
Accounting Aspects of Control Systems 4 of 5
Transfer Pricing and Control Systems
How should goods and services transferred between subsidiary companies in a multinational firm be priced?
The price at which goods are transferred is the transfer price
Accounting Aspects of Control Systems 5 of 5
Separation of Subsidiary and Manager Performance
May not be appropriate to use ROI for comparing and evaluating the managers of different subsidiaries.
The evaluation of a subsidiary should be kept separate from the evaluation of its manager.
Financial Management: The Investment Decision 1 of 6
Learning Objective 20-4 Discuss how operating in different nations affects investment decisions within the multinational enterprise.
Used to quantify the benefits, costs, and risks of an investment
Enables managers to compare different investment alternatives within and across countries
Financial Management: The Investment Decision 2 of 6
Capital Budgeting Process
Estimate the cash flows associated with the project over time.
Once the cash flows have been estimated, they must be discounted to determine their net present value using an appropriate discount rate.
If the net present value of the discounted cash flows is greater than zero, the firm should go ahead with the project.
Financial Management: The Investment Decision 3 of 6
Project and Parent Cash Flows
The project may not be able to remit all its cash flows to the parent.
Cash flows may be blocked from repatriation by the host-country government.
Cash flows may be taxed at an unfavorable rate.
The host government may require that a certain percentage of the cash flows generated from the project be reinvested within the host nation.
Financial Management: The Investment Decision 4 of 6
Adjusting for Political and Economic Risk
May result in the expropriation of foreign firms’ assets
Political and social unrest may also result in economic collapse, which can render worthless a firm’s assets.
May result in increased tax rates, the imposition of exchange controls that limit or block a subsidiary’s ability to remit earnings to its parent company, the imposition of price controls, and government interference in existing contracts
Financial Management: The Investment Decision 5 of 6
Adjusting for Political and Economic Risk continued
The biggest problem arising from mismanagement has been inflation.
Studies have shown a long-run relationship between a country’s relative inflation rate and changes in exchange rates.
However, this relationship is not totally reliable.
Financial Management: The Investment Decision 6 of 6
Risk and Capital Budgeting
Can treat all risk as a single problem by increasing the discount rate applicable to foreign projects in countries where political and economic risks are perceived as high
May penalize early cash flows too heavily and not penalize distant cash flows enough
Can revise future cash flows from the project downward to reflect the possibility of adverse political or economic changes sometime in the future
Financial Management: The Financing Decision
Learning Objective 20-5 Discuss the different financing options available to the foreign subsidiary of a multinational enterprise.
How will the foreign investment will be financed?
Use global capital market or borrow from sources in the host country
Cost of capital is typically lower in the global capital market, but host-country government restrictions may rule out this option.
Some governments court foreign investment by offering foreign firms low-interest loans, lowering the cost of capital.
Local debt financing
Financial Management: Global Money Management 1 of 4
Learning Objective 20-6 Understand how money management in the international business can be used to minimize cash balances, transaction costs, and taxation.
Minimizing Cash Balances
Firms generally prefer to hold cash balances at a centralized depository for three reasons:
The firm can deposit larger amounts.
If the centralized depository is located in a major financial center, it should have access to information about good short-term investment opportunities that the typical foreign subsidiary would lack.
The firm can reduce the total size of the cash pool it must hold in highly liquid accounts.
Financial Management: Global Money Management 2 of 4
Reducing Transaction Costs
Commissions to foreign exchange dealers
Transaction costs are costs of exchange.
Transfer fees are a bank charge for moving cash from one location to another.
Multilateral netting is a technique used to reduce the number of transactions between subsidiaries of the firm, thereby reducing the total transaction costs arising from foreign exchange dealings and transfer fees.
Bilateral netting is a settlement in which the amount one subsidiary owes another can be cancelled by the debt the second subsidiary owes the first.
Figure 20.2 Cash flows before multilateral netting
Figure 20.4 Cash flows after multilateral netting
Financial Management: Global Money Management 3 of 4
Managing the Tax Burden
Occurs when the income of a foreign subsidiary is taxed both by the host-country government and by the parent company’s home government
Tax credit allows a firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government.
Tax treaty is an agreement between two countries specifying which items of income will be taxed by the authorities of the country where the income is earned.
Deferral principle refers to the fact that parent companies are not taxed on the income of a foreign subsidiary until they actually receive a dividend from that subsidiary.
Tax haven is a country with an exceptionally low, or even no, income tax.
Financial Management: Global Money Management 4 of 4
Learning Objective 2-7 Understand the basic techniques for global money management.
Moving Money across Borders
Royalty payments and fees
Figure 20.5 An example of the tax aspects of a fronting loan
Appendix of Image Long Descriptions
Appendix 1 Figure 20.2 Cash flows before multilateral netting
A rectangle is created out of four subsidiaries (one in each corner): the Korean subsidiary, the Chinese subsidiary, the Taiwanese subsidiary, and the Japanese subsidiary. A series of arrows travel back and forth between each.
The Korean subsidiary sent 4 million dollars to the Chinese subsidiary, 5 million dollars to the Japanese subsidiary, and 6 million dollars to the Taiwanese subsidiary.
The Chinese subsidiary sent 3 million dollars to the Korean subsidiary, 5 million dollars to the Taiwanese subsidiary, and 3 million dollars to the Japanese subsidiary.
The Taiwanese subsidiary sent 3 million dollars to the Chinese subsidiary, 1 million dollars to the Japanese subsidiary, and 5 million dollars to the Korean subsidiary.
The Japanese subsidiary sent 2 million dollars to the Taiwanese subsidiary, 4 million dollars to the Korean subsidiary, and 2 million dollars to the Chinese subsidiary.
Appendix 2 Figure 20.4 Cash flows after multilateral netting
The Korean subsidiary pays 3 million dollars to the Taiwanese subsidiary. The Chinese subsidiary pays 1 million dollars to the Taiwanese subsidiary. The Chinese subsidiary also pays 1 million dollars to the Japanese subsidiary.
Appendix 3 Figure 20.5 An example of the tax aspects of a fronting loan
The Tax Haven Subsidiary deposits 1 million dollars into the London Bank. The London Bank loans 1 million dollars to the Foreign Operating Subsidiary. The Foreign Operating Subsidiary pays 9 percent interest (tax-deductible) to the London Bank. The London Bank pays 8 percent interest (tax-free) to the Tax Haven Subsidiary.
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