ADVANCED MANAGEMENT ACCOUNTING. International Issues in Advanced Management Accounting. Learning Objectives. Explain the role of the accountant in the international environment. Discuss the varying levels of involvement that firms can take in international trade.
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A multinational corporation (MNC) is one that “does business in more than one country in such a volume that its well-being and growth rest in more than one country.”
Foreign Trade Zones
Wholly Owned Subsidiaries
Emerging Role of the Multinational Corporation (MNC)
Trade treaties on tariffs are becoming increasingly important.
Importing is the process of bringing product in from a foreign country.
Exporting is the process of shipping product to a foreign country.
Foreign trade zones are areas near a customs port of entry that are physically on U.S. soil but considered to be outside U.S. commerce.
Currency risk management
Translation (accounting ) risk
Kinds of Risks
Assume a U.S. firm sells products to a French distributor.
On January 1 the French distributor orders 100 units of the product for
$1,000 per unit to be delivered immediately and paid in French francs
on March 15. The exchange rate at the time of sale was 5 francs per
dollar. On March 15, the exchange rate was 5.1 francs per dollar.
Impact of transaction risk:
Receivable in dollars 1/15 $100,000
Received in dollars on 3/15 98,039
Exchange loss $ 1,961 =======
The purchase of a forward contract can act as a hedge againsttransaction risk.
Suppose that U.S. consumers can purchase heavy equipment from Japanese and U.S. manufacturers for $50,000. If the purchase is made from Japanese manufactures at an exchange rate of 105 yen per dollar, the purchase price is set at 5,250,000 yen. If the value of the dollar weakens against the yen to 100 yen to the dollar, the cost of the same Japanese equipment becomes $52,250 for the U.S. customer. The Japanese Company is less competitive without a change in its cost structure.
Suppose you are a division manager in Mexico. Your division earned 320,000 pesos. This up from 200,000 pesos the year before, a hefty 60 percent increase. Now suppose the income is translated into dollars. If the exchange rate last year was 1.5 pesos per dollar and the exchange rate this year is 3 pesos per dollar, your net income translates into $133,333 net income last year and $106,667 this year. This translation results in a 20 percent decrease in net income.
The quality of information is better at the local level.
Local managers in the MNC are capable of a more timely response in decision making.
Social, legal, and language barriers are minimized.
Valuable training grounds for foreign subsidiary managers.
Political and Legal Factors:
An example of misleading results:
Assets Revenues Net Income Margin Turnover ROI
Brazil $10 $ 6 $ 3 0.50 0.60 0.30
Canada 18 13 10 0.77 0.72 0.55
Spain 15 10 6 0.60 0.67 0.40
On the basis of ROI, it appears that the manager of the Canadian subsidiary did the best job, while the manager of the Brazilian subsidiary did the worst job. However, the inflation rate in Brazil was 100% for the year. After adjusting the asset base for inflation, the ROI would be 60% for the Brazilian manager.
Action Tax Impact
Belgian subsidiary of Parent Company 42% tax rate
produces a component at a cost of $100 $0 income
per unit. Title to component is transferred Taxes paid = $0
to a Puerto Rico division at a transfer
price of $100.
Reinvoices to U.S. subsidiary at a $200 0% tax rate
transfer price $100 income
Taxes paid = $0
U.S. subsidiary sells unit to external 35% tax rate
company for $200 each. $0 income
Taxes paid = $0