International Accounting & Multinational Enterprises Lee H. Radebaugh Sidney J. Gray Ervin L. Black 6th edition John Wiley & Sons, Inc.

International Accounting and International Business Chapter 1 International Accounting and International Business International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

The International Development of the Accounting Discipline Double-entry accounting Developed in Italy between the 13th and 15th 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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 16th and 17th centuries saw the first major foreign investments (colonies) Center of commercial and business activity shifted westward International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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. International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Large Multinational Enterprises Top 10 Companies by Market Value in 2004 Source: Business Week Global 1000 Rank Name Country Market Value 2004 2003 ($ Billions)  1  1 General Electric U.S.   328.11  2  2 Microsoft 284.43  3  3 Exxon Mobil 283.61  4  4 Pfizer 269.66  5  5 Wal-Mart Stores 241.19  6  6 Citigroup 239.43 7 9 BP   Britain 193.05 8 10 American International Group 191.18 13 Intel 184.66 Royal Dutch Petroleum Netherlands 174.83 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Large Multinational Enterprises Top 10 Companies by Sales in 2003 Source: Fortune Global 500 Rank Name Country Sales 2003 2002 ($ Billions)  1  1 Wal-Mart Stores U.S. 263.00  2  5 BP Britain 232.57  3  3 Exxon Mobil 222.88  4  4 Royal/Dutch Shell Group Britain/Neth. 201.73  5  2 General Motors 195.32  6  6 Ford Motor 164.51 7 DaimlerChrysler Germany 156.60 8 Toyota Motor Japan 153.11 9 General Electric 134.18 10 14 Total France 118.44 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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.) International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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) International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Major Development Factors International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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.) International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 http://www.nyse.com/international/1088623922129.html International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

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 International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

The Field of International Accounting Descriptive/comparative accounting Important issues Forces and conditions that create international differences Trend toward convergence International transactions/multinational enterprises Financial reporting problems Translation of foreign currency financial statements, Information systems Budgets and performance evaluation Audits Taxes International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black