Dr Samuel Owusu-Agyei Office HU 3.40 International Developments in Accounting ACFI 3217 Multinational Companies Dr Samuel Owusu-Agyei Office HU 3.40

What are Multinational Companies ‘‘Corporations which own or control production or service facilities outside the country in which they are based’’ (United Nations). They mostly operate in foreign countries through subsidiaries Mostly large corporate bodies They have more power and visibility

What are Multinational Companies Viewed to lack of concern for the economic well-being of particular geographic regions Perceived to favour home country in tough economic decisions Perceived as gaining power in relation to national government agencies

What are not Multinational Companies Firms that are headquartered in one country and produce and market all their goods and/ or services in that one country. Firms that are headquartered and produce in the same country but export some of their output.

Trading across borders Rules on economic, monetary, and trade relations between countries are from the: World Bank IMF World Trade Organisation

World Trade Organisation (WTO) An intergovernmental organisation Established on 1 January 1995 to replace the General Agreement on Tariffs and Trade (GATT). Objective : To support cross-border trade

World Trade Organisation This is encouraged by:- Reduction in trade barriers. This results in New markets opening up. This can result in significant changes in world politics.

Limitations of National Market Investment in shares not always popular with all markets. Private portfolios: 12% in the UK 20% in USA Yet Germany is 6% Therefore foreign markets are necessary if generating large capital.

Why invest internationally? Portfolio diversification internationally. Markets move similarly but not with perfect correlation Growth industries – multinational companies are market leaders

Investment strategies for diversity Passive Invest in an index-based portfolio, ignore company information. Frequency of trading is aldso reduced. Active Evaluate companies in depth. High frequency of trading to exploit profitable conditions Mixed Mix both passive and active investment strategies, depending on quality of information.

Equity investments: demand and supply Opportunities to be exploited Pension schemes Private sector schemes invest in equities for growth. Privatization Governments selling shareholdings to private sector investors. Internationalization More equity capital is available.

Benefits of foreign listing: Public share offerings Need to raise additional equity finance. Local stock market too small or lacks liquidity. Overcome national barriers, such as Restrictions on foreign investors. Foreign currency controls. To support reputation of product in overseas markets. To provide equity finance for overseas acquisition. Large foreign ownership may protect company from takeover.

Benefits of foreign listing: Signal to the Market Publicity for the company and its products. Prestige as international player. Gives confidence to overseas governments or regulators.

Costs of foreign listing Underwriting (insurance) of new offers. Registration and regulation. Initial disclosure requirements. Requirements for continuing disclosure. Control and oversight systems. Clearance and settlement of share deals ( shares acquired from existing shareholders)

London Stock Exchange Accepts all EU accounting under ‘mutual recognition’. Accepts US GAAP and IASs. Strong element of foreign listing in London.

Empirical research What factors explain choice of listing? Size of company in domestic market Importance of foreign sales Importance of investment in foreign countries Importance of foreign employees NOT disclosure rules of the Stock Exchange

International Financial Reporting Full annual report in other language(s)? Shortened report in other language(s)? Additional costs of translations Are translations audited? Formats of financial statements?

Convenience translations Currency may be unfamiliar to foreign investors. Convenience translation does not follow accounting principles of the new currency. For example, yen translated to dollars but transactions are still accounted in Japanese GAAP.

Use of IFRS Compliance has been low but is increasing. There are different levels of compliance. Some standards are more problematic than others (e.g. asset/expense distinction) Is IFRS information useful to the market? (market still needs to learn about IFRS)

Impact of Internationalization on domestic reports Internationalization leads to development of the International Financial Reporting Standards (IFRS). Domestic companies may use IASs/IFRSs instead of national rules, if permitted. Companies may use national GAAP but choose options that meet the requirements of other countries’ GAAP. IFRS introduces ‘fair value accounting’. Thus, domestic firms may measure assets and liabilities at their current market values.

Fair Value Issue The fair value accounting can make accounting more informative and relevant because: More timely information and observable economic gains and losses on securities, derivatives and other transactions are incorporated into the financial statements.

Fair Value Issue The 2008 financial crises has questioned the fair value practice. As asset prices rose through 2008, the fair value gains on certain assets held by financial institutions were recognized as net income and therefore was included in the calculation of executive bonuses. As asset prices began falling, many financial executives blamed fair value markdowns for accelerating the decline.

Fair Value Issue However, US GAAP and IFRS which are used by over a 100 countries worldwide, continue to use fair value extensively, i.e. Derivatives and hedges, employee stock options, financial assets and goodwill impairment testing.