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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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International Issues

in Advanced Management Accounting

learning objectives
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.
  • Explain the ways accountants can manage foreign currency risk.
  • Explain why multinational firms choose to decentralize.
learning objectives continued
Learning Objectives (continued)
  • Explain how environmental factors can affect performance evaluation in the multinational firm.
  • Discuss the role of transfer pricing in the multinational firm.
  • Discuss ethical issues that affect firms operating in the international environment.
management accounting in the international environment
Management Accounting in the International Environment
  • Politics
  • Economics
  • Marketing
  • Management
  • Information Technology

Knowledge needed by

Management Accountant

multinational corporation mnc
Multinational Corporation (MNC)

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.”

levels of involvement in international trade
Levels of Involvement inInternational Trade



Foreign Trade Zones

Wholly Owned Subsidiaries

Joint Ventures

Emerging Role of the Multinational Corporation (MNC)

Trade treaties on tariffs are becoming increasingly important.

importing and exporting
Importing and Exporting

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
Foreign Trade Zones

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.

foreign currency exchange
Foreign Currency Exchange

Currency risk management

Transaction risk

Economic risk

Translation (accounting ) risk

Kinds of Risks

a transaction risk example
A Transaction Risk Example


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.

an economic risk example
An Economic Risk Example


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.

a translation risk example
A Translation Risk Example


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.

advantages of decentralization in the mnc
Advantages of Decentralizationin the MNC

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.

environmental factors affecting performance evaluation in the mnc
Environmental Factors Affecting Performance Evaluation in the MNC

Economic Factors:

  • Organization of central banking system
  • Economic stability
  • Existence of capital markets
  • Currency restrictions
environmental factors affecting performance evaluation in the mnc1
Environmental Factors Affecting Performance Evaluation in the MNC

Political and Legal Factors:

  • Quality, efficiency, and effectiveness of legal structure
  • Effect of defense policy
  • Impact of foreign policy
  • Level of political unrest
  • Degree of governmental control of business
environmental factors affecting performance evaluation in the mnc2
Environmental Factors Affecting Performance Evaluation in the MNC

Educational Factors:

  • Literacy rate
  • Extent and degree of formal education and training systems
  • Extent and degree of technical training
  • Extent and quality of management development programs
environmental factors affecting performance evaluation in the mnc3
Environmental Factors Affecting Performance Evaluation in the MNC

Sociological Factors:

  • Social attitude toward industry and business
  • Cultural attitude toward authority and persons in subordinate positions
  • Cultural attitude toward productivity and achievement (work ethic)
  • Social attitude toward material gain
  • Cultural and racial diversity
measuring performance in the mnc
Measuring Performancein the MNC

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.

income taxes and transfer pricing
Income Taxes and Transfer Pricing

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

acceptable transfer pricing methods
Subject to IRS Regulations:

Comparable Uncontrolled Price Method

Resale Price Method

Cost-Plus Method

Acceptable Transfer Pricing Methods