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

International Accounting & Multinational

Enterprises

Lee H. Radebaugh Sidney J. Gray

Ervin L. Black6th edition

John Wiley & Sons, Inc.


Chapter 1

International Accounting

and

International Business


The International Development of the Accounting Discipline

Double-entry accounting Developed in Italy between the 13th and 15th Centuries Spread to other European countries

Luca Pacioli – Summa de Arithmetica Memorandum book, journal, and ledger

Adapted due to changes in Business form Taxation Globalization


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 systems Legal systems Political systems Sociocultural characteristics


The Evolution and Significance of International Business Began with the Greeks around the fifth

century B.C. Trade became a privilege granted by the

state 16th and 17th centuries saw the first major

foreign investments (colonies) Center of commercial and business activity

shifted westward


The Evolution and Significance of International Business

Industrial Revolution Multinational firms developed – Ford, Singer Foreign investments become more influential

Post-World War II Period International business stunted

Great Depression World War II

Renewal in foreign trade and investment Formation of European Economic Community (now the

European Union) Greater stability


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


Forms of International Involvement

Exports and imports of goods and services Strategic alliances

Licensing agreement (intangible property) Franchise agreement (Holiday Inn, McDonald’s)

Investment abroad Direct investment Joint venture


Multinational Enterprises

Possess a worldwide view of Production Sourcing of raw materials and components Final markets

Elite MNE 10% of a company’s overall assets, earnings, and

employees are abroad Significant geographical spread International experience of executives


Multinational Enterprises

Small companies Export and import Manufacture products abroad or outsource

production Licensing agreements.

Firm Size and Saturation of Domestic Market

Probability of International Transactions


Large Multinational Enterprises

Top 10 Companies by Market Value in 2004Source: Business Week Global 1000

RankName Country

Market Value2004 2003 ($ Billions) 1 1 General Electric U.S. 328.11 2 2 Microsoft U.S. 284.43 3 3 Exxon Mobil U.S. 283.61 4 4 Pfizer U.S. 269.66 5 5 Wal-Mart Stores U.S. 241.19 6 6 Citigroup U.S. 239.43 7 9 BP Britain 193.05 8 10 American International Group U.S. 191.18 9 13 Intel U.S. 184.66 10 8 Royal Dutch Petroleum Netherlands 174.83


Large Multinational Enterprises

Top 10 Companies by Sales in 2003Source: Fortune Global 500

RankName Country

Sales2003 2002 ($ Billions) 1 1 Wal-Mart Stores U.S. 263.00 2 5 BP Britain 232.57 3 3 Exxon Mobil U.S. 222.88 4 4 Royal/Dutch Shell Group Britain/Neth. 201.73 5 2 General Motors U.S. 195.32 6 6 Ford Motor U.S. 164.517 7 DaimlerChrysler Germany 156.608 8 Toyota Motor Japan 153.119 9 General Electric U.S. 134.1810 14 Total France 118.44


Deciding to Become Global

Assessment of External environment Internal capabilities of the firm

Environmental constraints Educational, sociological, political and legal, and

economic Country-specific advantages (cheap materials,

labor) Firm-specific advantages – intangible assets


Environmental Influences on Accounting Enterprise ownership

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.)


Environmental Influences on Accounting

Developed accounting profession Judgmentally based accounting systems Depends upon accounting education and

research Political system – accounting system reflects

political philosophy Social climate – level of employee awareness


Environmental Influences on Accounting

Economic growth and development Inflation leads to alternative approaches Legal system and regulation of accounting

Civil codes (France and Germany) Common law (U.S. and U.K.)

Culture (societal or national values) International factors

Colonial influence Regional trade blocs (European Union)


Accounting Standards and Traditions

International Accounting Standards Board Works for convergence

Former socialist economies are adjusting Russia and Eastern Europe

British and continental European traditions are now being coordinated


Major Development Factors

Corporations recognized as legal entities with limited liability Protects shareholders and creditors

Professional management A point of controversy

Emergence of securities markets Fundamental element of the transition to a market

economy Shows need to attract foreign investment Broadened disclosure


Major Development FactorsExhibit 1.2: Market Capitalization by National

Securities Market (Top 5 Countries)

43%

20%

7%

4%

26%United States

Great Britain

Japan

France

Rest of the World


Corporate Disclosure

Disclosure to finance providers can be seen as a spectrum Least disclosure – shareholders and investors 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.)


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 exchanges Exchanges in developing countries are

growing


A Wider Audience

Increased disclosure to other groups Employees, trade unions, consumers,

government agencies, and the general public Expectations of nonfinance providers

Not clearly defined Techniques to measure them do not exist

Less developed countries have less accountability and disclosure


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. Host country’s view

Business activities of an MNE are of primary concern


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


Accounting Aspects of International Business

Exposure to International Accounting Importing or exporting Costs of outside expertise

Increase with increased trade Should develop in-house experts Separate organization to handle international trade

Establishment of a foreign unit Awareness of international market conditions

Lower cost of capital


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

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