1 Matakuliah: F0142/Akuntansi Internasional Tahun: September 2006 Session 01 International Accounting and International Business

2 Double-entry accounting –Developed in Italy between the 13 th and 15 th Centuries –Spread to other European countries Luca Pacioli – Summa de Arithmetica –Memorandum book, journal, and ledger Adapted due to changes in –Business form –Taxation –Globalization The International Development of the Accounting Discipline

3 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 systems –Legal systems –Political systems –Sociocultural characteristics

4 The Evolution and Significance of International Business Began with the Greeks around the fifth century B.C. Trade became a privilege granted by the state 16 th and 17 th centuries saw the first major foreign investments (colonies) Center of commercial and business activity shifted westward

5 The Evolution and Significance of International Business Industrial Revolution –Multinational firms developed – Ford, Singer –Foreign investments become more influential Post-World War II Period –International business stunted Great Depression World War II –Renewal in foreign trade and investment Formation of European Economic Community (now the European Union) Greater stability

6 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

7 Forms of International Involvement Exports and imports of goods and services Strategic alliances –Licensing agreement (intangible property) –Franchise agreement (Holiday Inn, McDonald’s) Investment abroad –Direct investment –Joint venture

8 Multinational Enterprises Possess a worldwide view of –Production –Sourcing of raw materials and components –Final markets Elite MNE –10% of a company’s overall assets, earnings, and employees are abroad Significant geographical spread International experience of executives

9 Multinational Enterprises Firm Size and Saturation of Domestic Market Probability of International Transactions Small companies - Export and import - Manufacture products abroad or outsource production - Licensing agreements.

10 Large Multinational Enterprises Top 10 Companies by Market Value in 2004 Source: Business Week Global 1000 Rank NameCountry Market Value ($ Billions) 1 1General ElectricU.S MicrosoftU.S Exxon MobilU.S PfizerU.S Wal-Mart StoresU.S CitigroupU.S BP Britain American International GroupU.S IntelU.S Royal Dutch PetroleumNetherlands174.83

11 Large Multinational Enterprises Top 10 Companies by Sales in 2003 Source: Fortune Global 500 Rank NameCountry Sales ($ Billions) 1 1Wal-Mart StoresU.S BPBritain Exxon MobilU.S Royal/Dutch Shell GroupBritain/Neth General MotorsU.S Ford MotorU.S DaimlerChryslerGermany Toyota MotorJapan General ElectricU.S TotalFrance118.44

12 Deciding to Become Global Assessment of –External environment –Internal capabilities of the firm Environmental constraints –Educational, sociological, political and legal, and economic –Country-specific advantages (cheap materials, labor) Firm-specific advantages – intangible assets

13 Environmental Influences on Accounting Enterprise ownership –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.)

14 Environmental Influences on Accounting Developed accounting profession –Judgmentally based accounting systems –Depends upon accounting education and research Political system – accounting system reflects political philosophy Social climate – level of employee awareness

15 Environmental Influences on Accounting Economic growth and development Inflation leads to alternative approaches Legal system and regulation of accounting –Civil codes (France and Germany) –Common law (U.S. and U.K.) Culture (societal or national values) International factors –Colonial influence –Regional trade blocs (European Union)

16 Accounting Standards and Traditions International Accounting Standards Board –Works for convergence Former socialist economies are adjusting –Russia and Eastern Europe British and continental European traditions are now being coordinated

17 Major Development Factors Corporations recognized as legal entities with limited liability –Protects shareholders and creditors Professional management –A point of controversy Emergence of securities markets –Fundamental element of the transition to a market economy –Shows need to attract foreign investment –Broadened disclosure

18 Major Development Factors

19 Corporate Disclosure Disclosure to finance providers can be seen as a spectrum –Least disclosure – shareholders and investors –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.)

20 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 exchanges Exchanges in developing countries are growing

21 A Wider Audience Increased disclosure to other groups –Employees, trade unions, consumers, government agencies, and the general public Expectations of nonfinance providers –Not clearly defined –Techniques to measure them do not exist Less developed countries have less accountability and disclosure

22 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. Host country’s view –Business activities of an MNE are of primary concern

23 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

24 Accounting Aspects of International Business Exposure to International Accounting –Importing or exporting –Costs of outside expertise Increase with increased trade Should develop in-house experts Separate organization to handle international trade –Establishment of a foreign unit –Awareness of international market conditions Lower cost of capital

25 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