Chapter 1

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

2. 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

3. 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

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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