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

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, Legal & Political systems Sociocultural characteristics Moving toward uniformity of Acctg. Standards Why do you feel uniformity is important?

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) Intangible property: production process, formula, design, patent, invention Firms earn a return on the intellectual property without having the take risk of expanding abroad using capital Franchise agreement (Holiday Inn, McDonald’s) Use of trademark with brand name recognition Investment abroad Direct investment – companies acquire degree of control of foreign corporation to influence management decisions Joint venture- two or more firms involved in establishing a 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 Generally no less than10% 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 Small companies (esp high tech firms) Export and import Manufacture products abroad or outsource production (Accounting firms with India?) Licensing agreements. Firm Size and Saturation of Domestic Market Probability of International Transactions

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black Large Multinational Enterprises NetherlandsRoyal Dutch Petroleum U.S. Intel U.S. American International Group BritainBP U.S. Citigroup U.S. Wal-Mart Stores U.S. Pfizer U.S. Exxon Mobil U.S. Microsoft U.S. General Electric1 1 ($ Billions) Market Value CountryName Rank Source: Business Week Global 1000 Top 10 Companies by Market Value in 2004

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black Large Multinational Enterprises FranceTotal U.S.General Electric JapanToyota Motor GermanyDaimlerChrysler U.S.Ford Motor U.S.General Motors Britain/Neth.Royal/Dutch Shell Group U.S.Exxon Mobil BritainBP U.S.Wal-Mart Stores1 1 ($ Billions) Sales CountryName Rank Source: Fortune Global 500 Top 10 Companies by Sales in 2003

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: literacy, access to specialized/higher education: attitude toward education / quality Sociocultural: attitude toward managers/authority, interorganizational cooperation, attitude toward success, class structure, attitude toward wealth, risk political and legal: legal rules, stability, foreign policy Economic: International trade patterns, financial organization 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 – need for public accountability/disclosure 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 – presence of Big four and other international firms Judgmentally based accounting systems Depends upon accounting education and research Political system – accounting system reflects political philosophy Social climate – attitude of informing employees /level of employee awareness

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black Environmental Influences on Accounting Economic growth and development – uniformity toward treatment of intangibles etc. Inflation leads to alternative approaches such as deviation from historical cost principles Legal system and regulation of accounting Civil codes (France and Germany) Common law (U.S. and U.K.) – Post SARBOX Culture (societal or national values) International factors Colonial influence – use methods of relative countries Membership in 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 – making transition to market approach 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 Why was limited liability important for developing accounting rules? – Need for transparency Protects shareholders and creditors – esp publicly traded corporations Other factors of a corporate entity? Professional management Separation of ownership v. control – possible lack of goal congruence Less of an issue in family owned businesses / closely helds A point of controversy Emergence of securities markets Raises capital for corporations to expand operations Fundamental element of the transition to a market economy Shows need to attract foreign investment – such GAAP issues as comparability, going concern, transparency Broadened disclosure – Increased importance of financial analysts. Fundamental to emerging markets such as China, Eastern Europe, Latin America

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black Corporate Disclosure Disclosure/access to detailed financial data to finance providers can be seen as a spectrum Least disclosure – shareholders and investors – Shareholder control myth- so SH really control the entity. 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 European exchanges Exchanges in developing countries are growing

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 Investment decisions 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 – Tax Avoidance/evasion / Political Interference/Discriminatory Practices Host country’s view Business activities of an MNE are of primary concern – Why? How does host country benefit?

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 Provides opportunities to coordinate prices – transfer pricing rules…hot button for U.S. Tax

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black Accounting Aspects of International Business -Evolution Exposure to International Accounting First Exposure: Importing or exporting Letters of credit / Customs regulations / Financial statements (translation / interpretation) if not listed in Standard/Poors international credit ratings Costs of outside expertise Increase with increased trade Should develop in-house experts Separate organization to handle international trade Possible Establishment of a foreign unit or even a wholly owned subsidiary – new issues relating to foreign presence and adherence to foreign rules (accounting and otherwise) 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 Important issues Financial reporting problems Translation of foreign currency financial statements, Information systems Budgets and performance evaluation Audits Taxes