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

2. 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

3. 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

4. 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.

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

6. 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

7. 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.

8. 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.

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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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)

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

16. 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

17. 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?

18. 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.

19. 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)

20. 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.

21. 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.

22. 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.

23. 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.