1. Gray, Salter & Radebaugh Chapter 4 GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS   Sidney J. Gray, University of New South Wales   Stephen B. Salter, University of Cincinnati   Lee H. Radebaugh, Brigham Young University

2. Gray, Salter & Radebaugh Chapter 4 CHAPTER FIVE PLANNING AND PERFORMANCE EVALUATION IN MULTINATIONAL ENTERPRISES

3. Gray, Salter & Radebaugh Chapter 4 INTRODUCTION This chapter deals with:   special problems faced by MNE management;   control in the global environment;   the planning process and operational plan with respect to strategic direction.

4. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS   Gupta & Govindarajan (1991) identify the following stages in a formal strategic control system: Periodic strategy reviews Annual operating plans Formal monitoring of strategic results Personal rewards and central intervention.

5. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS Continued   Benefits of a formal strategic process: Greater clarity and realism in planning; “Stretching” of performance standards; Motivation for business unit managers; Timely intervention by central management; Clearer responsibilities.

6. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS Continued   For this system to work, we need to: Select the right strategic objectives; Set suitable targets: – –for a full-fledged strategic business unit - ROI. – –standards benchmarked on the performance of key competitors. Design a system to put pressure on management to perform; Ensure the process does not become too “big”.

7. Gray, Salter & Radebaugh Chapter 4 THE STRATEGIC CONTROL PROCESS Continued   Control problems unique to a global company/environment include: different operating environments culture; legal systems; political differences

8. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM   Planning and Budgeting Issues: Determining the currency in which the budget should be prepared: – –local currency or – –parent currency?

9. Gray, Salter & Radebaugh Chapter 4 Acme Brush of Brazil Cooper Grant is president of Acme Brush of Brazil the wholly owned subsidiary of U.S.-based Acme Brush Inc. Cooper Grant’s compensation package consists of a combination of salary and bonus. His annual bonus is calculated as predetermined percentage of the pretax annual income earned by Acme Brush of Brazil. A condensed income statement for Acme Brush of Brazil for the most recent year is as follows: Sales …………………. BRL 10,000 Expenses …………….. 9,500 Pretax income ………. BRL 500 After translating the Brazilian Real income statement into U.S. dollars, the condensed income statement for Acme Brush of Brazil appears as follows: Sales …………………. USD 3,000 Expenses …………….. 3,300 Pretax income (loss)…. USD ( 300)

10. Gray, Salter & Radebaugh Chapter 4 Acme Brush of Brazil   The BRL pre-tax income becomes a USD pre-tax loss because sales and expenses are translated at different exchange rates.   Specifically, Sales are translated at an exchange rate of USD 0.30/BRL and Expenses are translated at an exchange rate of USD 0.347368/BRL.   The question is whether Acme Brush should use BRL income or USD income to evaluate Cooper Grant’s performance.   There is no unequivocally correct answer to this question.   Issues that might be discussed include: What is the Brazilian subsidiary’s objective? To generate profits that can be distributed to U.S. stockholders? Does Cooper Grant have the ability to “control” USD income? Do the translation procedures that result in a USD pre-tax loss make economic sense?

11. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Planning and Budgeting Issues: Currencies fluctuating in value is beyond the control of the MNE: – –managers should not be held accountable for the results of events over which they have no control. – –e.g., hedging against potential foreign exchange losses if they have no responsibility to hedge. – –If the manager is given the authority, then that manager should be evaluated in terms of translated profitability.

12. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Planning and Budgeting Issues: It is difficult for senior managers to understand budgets generated in different currencies. Thus: – –Translating budgets into home currencies allows consolidation of budgets into a firm wide view. – –Management might want shareholders to see parent country profitability.

13. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Budget and Currency Practices of MNEs: Robbins and Stobaugh (1973) found that: – –less than half of MNEs judged subsidiary performance in terms of translated dollar amounts. – –Only 12% used both local currency & dollar standards – –Many use local currency budget and actual figures. Morsicato (1978) found many used both dollar and local currency budgets.

14. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Capital Budgeting: This is the longer-term relation of operational budgeting. Must consider a variety of factors: – –Project subsidiary cash flows vs. parent cash flows – –Taxation – –Inflation rates – –Unanticipated exchange rate changes – –Political risk

15. Gray, Salter & Radebaugh Chapter 4 CHALLENGES OF CONTROL IN THE GLOBAL FIRM Continued   Capital Budgeting: May require more judgment than operational budgeting because when environmental factors are used in long term strategic decisions, the outcome may be at odds with a desire for strong ROIs.

16. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING   This refers to pricing of goods and services transferred between members of a corporate family.   Different corporate units may transfer: raw materials; semi-finished and finished goods.

17. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING Continued   Home office units may allocate: fixed costs interest on loans fees royalties for use of trademarks, copyrights.   Such prices should be based on production costs but often they are not.

18. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING Continued   Why internal transfers may be priced with little consideration for market prices: taxation, competition/market share, circumventing national controls, boosting subsidiary profits.

19. Gray, Salter & Radebaugh Chapter 4 INTRA-CORPORATE TRANSFER PRICING Continued   Prices are arbitrarily established because of taxation: different tax rates complicate things, e.g., high tax countries cause incentive to charge many expenses against parent company income. some authorities provide specific guidelines on how to allocate expenses. this likely eliminates selecting an allocation method consistent with manufacturing strategy.