International Accounting and Multinational Enterprises 5/e

International Accounting and International Business Chapter One

Learning objectives:  Identify the key trends in the development of accounting through history  Introduce some of the key national differences in accounting systems worldwide  Highlight the evolution of business to modern times  Discuss the important accounting dimensions of global business and the major topics that comprise the field of international accounting  Introduce the chapters in the textbook

Main contents of chapter one 1. Introduction 2. The International Development of the Accounting Discipline (1) Early Italian Influence (2) Luca Pacioli (3) Subsequent Developments 3. National Differences in Accounting Systems (1) Implications of National Differences in Accounting 4. The Evolution and Significance of International Business (1) The Pre-Industrial Period (2) The Industrialization Period (3) The Post-World War II Period (4) The Multinational Era A. Reasons for International Involvement B. Forms of International Involvement C. Global Enterprises D. Large MNEs E. The Decision to Become Global 5. Accounting Aspects of International Business (1) Establishing an Internal International Accounting Capability 6. The Field of International Accounting (1) The Importance of Studying International Accounting 7. Overview of the Text 8. Summary

I.Introduction  Definition of International Accounting  The definition includes (1) international transactions (2) comparative GAAP  (3) harmonization and (4) control of global operations. International accounting encompasses all major areas of accounting.  Why Study International Accounting?  Since the operating environments for economic entities are dynamic, accounting must also stay current with changing environments. Only then can it possibly retain its relevance and reliability for economic decision-making. International accounting is in direct response to the globalization phenomenon.

I.Introduction  The Reasons for Going International  The greatest reason for becoming a participant in the global economy is the growth opportunities. However, there are several other reasons that need to be mentioned.  The problems encountered in international operations should also be noted. The most serious problem found while doing business in the Eastern European countries is uncertain legislative and business environment, while in the rest of the world it is bureaucratic red tape.

II. The International Development of the Accounting Discipline  A. Early Italian Influence  1.Record keeping can be traced to 3600BC  2.Italy became the center of trade routes  3.Genoa in 1340AD -- double entry, business entity, money  4.Florentine -- development of large corporations and compagnie (partnerships)  5.Venice -- responsible for the spread of double entry accounting

II. The International Development of the Accounting Discipline  B.Luca Pacioli  1.Franciscan monk educated in mathematics  2.Taught at several universities, turored three sons of a Venetian merchant  3.In 1494, published Summa de arithmetica geometria proportioni et proportionalita  4.Introduced three books of record -- the memorandum book, the journal and the ledger -- that required a debit and credit for the transaction to remain in equilibrium

II. The International Development of the Accounting Discipline  C.Subsequent Developments  1.Decline of Italy as a commercial power, shifting influence to Atlantic  2.Rise of the nation-state in the 1500s -- public finance  3.French revolution in late 1700s brought Italy under the influence of the French and Austrians, resulting in some changes in accounting  4.Scale of enterprises increased, followed by rapid industrialization, and finally multinationalization

III.National Differences in Accounting Systems  A. Accounting systems evolve from and reflect the environments they serve  B. Legal, political, economic, cultural, educational environments create differences

IV. The Evolution and Significance of International Business  A.The Pre-Industrial Period  B.The Industrialization Period  C.The Post-World War II Period  D.The Multinational Era  1.Reasons for International Involvement  2.Forms of International Involvement  3.Global Enterprises  4.Large MNEs  5.The Decision to Become Global  i. Factors include environment constraints and firm- specific advantages

V. Accounting Aspects of International Business  A.Establishing an internal international accounting capability  1.Different ways of operating abroad and the accounting problems they create

VI.The Field of International Accounting  A. Two major areas: Descriptive/comparative; accounting dimensions of international transactions/MNEs

VII.Overview of the Textbook  A.Topical Organization  1.Introduction (Chapter 1)  2.Comparative Accounting and International Harmonization (Chapters 2,3,5,&6)  3.International Financial Reporting Issues (Chapters 7-11)  4.International Financial Analysis (Chapters 4)  5.External Auditing Issues (Chapter 12)  6.International Management Accounting and Control  (Chapters 13-14)  7.Taxation (Chapter15)

World Capital Markets North America  New York, San Francisco, Chicago, Toronto Asia  Hong Kong, Tokyo Australia  Sydney Europe  London, Zurich, Frankfurt, Brussels, Milan, Paris, Amsterdam, Stockholm, Madrid South America  Buenos Aires, Santiago, Mexico City Africa  Johannesburg 1

Historical Development of Accounting Ancient World  Mesopotamia, Egypt, India, China, Rome Middle Ages  Genoa, Florence, Venice New World  Maya, Inca, Aztec 2

Luca Pacioli ( ) Published Summa de Arithmetica in 1494  First published text on double-entry accounting  Introduced the “Memorandum Book,” “Journal,” and “Ledger” 3

National Differences in Accounting Systems  Historical developments did not lead to uniformity in international accounting practice  Despite similarities, no two systems are exactly alike Reasons for Differences:  Economic,  Educational,  Legal,  Political, and  Social/ Cultural Factors 4

Implications of National Differences in Accounting  Acts as a barrier to the free-flow of international business information 5

Evolution and Significance of International Business Greek Period  First international sales of mass-produced products through Greece in 5 B.C. Roman Period  First open market with political stability, better transportation, and few tariffs or restrictions Middle Ages  Banking, Insurance, and trade fairs in Byzantium 6

The Preindustrial Period Europe: Rise of Mercantilism  Right to trade regulated by the state,  Colonialism driven by state’s direct investment in colonies and near- monopolistic control of trade, and  Dominated by Western European Nations. 7

The Industrialization Period:  Technological inventions led to unprecedented mass production and standardization,  Implementation of large-scale infrastructure between historically separate markets, and  Birth of large multinational corporations such as: Singer, Ford, Dunlop, and Lever Brothers. 8

The Post-World War II Period  Great Depression and WWII stunted international trade  Following the end of the war, demand for products and services, trade and investment sharply increased. 9

The Multinational Era  Involvement in International trade is essential for developing nations, and  For the continued economic growth of developed nations. 10

What is International Business?  All business transactions involving two or more countries. 11

Reasons for International Involvement  Expand sales,  Gain access to raw materials and other factors of production, and  Obtain information, technical expertise (i.e. patents, licenses, “know-how”). 12

Forms of International Involvement  Exporting and Importing of goods and services,  Strategic alliances including licensing agreements, franchises, and joint ventures, (McDonalds, Holiday Inn, Pizza Hut), and  Direct investment. 13

Global Enterprises Multinational enterprises are those which:  Have a world-wide view of production, materials, components and final markets;  Have over 10% of sales, assets, earnings, and employees abroad. 14

Large MNE’s Indicators:  Sales and Market Value,  Profits and Return on Shareholders Equity, and  Worldwide stock market valuations. 15

The Decision to Become Global: External Environment v. Internal Capabilities Environmental Constraints- Domestic:  Educational,  Sociological (Socioculteral),  Political/ Legal, and  Economic. 16 Environmental Constraints- International:  May differ from domestic constraints and mostly concerned with nationalism

Firm Specific Advantages  Intangibles that provide a unique firm advantage,  Examples include market-niche capabilities and personnel advantages. 17

Accounting Aspects of International Business  Accounting requirements differ with each successive stage of international involvement,  For example, import-export stage would require investigation of potential buyer or seller for purposes of determining credit- worthiness and capacity to perform.  Initial Issues may include: statements written in foreign language, amounts in foreign currencies, and information produced using different standards. 18

Establishing an Internal International Accounting Capability Increased international involvement requires:  Internal accounting resources,  Creation of separate organization to handle international trade, and  Creation of a foreign operation of some kind. Degrees of Involvement:  International accounting knowledge may be necessary even with no direct international business involvement (I.e. company needs to borrow money or sell stock internationally). 19

The Field of International Accounting  Increased need for accountants who understand the international accounting environment,  International certification possibilities, and  Fascinating career opportunities. 20