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Chapter 1. International Accounting and International Business. National Differences in Accounting Standards . Many different systems throughout the world Reconciliation is still a challenge Accounting systems Evolve Reflect the environments they serve

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chapter 1

Chapter 1

International Accounting

and

International Business

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

national differences in accounting standards
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
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
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
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 enterprises1
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
Large Multinational Enterprises

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

large multinational enterprises1
Large Multinational Enterprises

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

deciding to become global
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
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 accounting1
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 accounting2
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
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
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
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
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
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
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 enterprises1
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
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
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

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