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  • International Business
    9e

    By Charles W.L. Hill

    McGraw-Hill/Irwin

    Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

  • Chapter 20

    Accounting and Finance in the International Business

    20-*

    What Is
    Financial Management?

    Financial management involves

    Investment decisions what to finance

    Financing decisions how to finance those decisions

    Money management decisions how to manage the firms financial resources most efficiently

    20-*

    What Is Accounting?

    Accounting is the language of businessit is the way firms communicate their financial positionsAccounting is more complex for international firms because of differences in accounting standards from country to countrydifferences make it difficult for investors, creditors, and governments to evaluate firmsIt is difficult to compare financial reports from country to country because of national differences in accounting and auditing standards

    LO1: Discuss the national differences in accounting standards.

    20-*

    What Determines National Accounting Standards?

    Several variables influence the development of a countrys accounting system includingthe relationship between business and the providers of capitalpolitical and economic ties with other countriesthe level of inflationthe level of a countrys economic developmentthe prevailing culture in a country

    LO1: Discuss the national differences in accounting standards.

    20-*

    How Do Providers Of Capital Influence Accounting?

    A countrys accounting system reflects the relative importance of each constituency as a provider of capital accounting systems in the U.S. and Great Britain are oriented toward individual investorsSwitzerland and Germany focus on providing information to banks

    Three external sources of capital:

    Individual investors

    Buying shares and bonds

    Banks

    Loan capital

    Government

    Make loans or investment

    20-*

    How Do Political And Economic Ties Influence Accounting?

    Similarities in accounting systems across countries can reflect political or economic tiesthe U.S. accounting system influences the systems in the Philippinesin the European Union, countries are moving toward common standardsthe British system of accounting is used by many former colonies

    LO1: Discuss the national differences in accounting standards.

    20-*

    How Do Levels of Development Influence Accounting?

    Developed nations tend to have more sophisticated accounting systems than developing countrieslarger, more complex firms create accounting challengesproviders of capital require detailed reportsMany developing nations have accounting systems that were inherited from former colonial powers lack of trained accountants

    LO1: Discuss the national differences in accounting standards.

    20-*

    What Are Accounting And Auditing Standards?

    Accounting standards are rules for preparing financial statementsthey define useful accounting informationAuditing standards specify the rules for performing an auditthe technical process by which an independent person gathers evidence for determining if financial accounts conform to required accounting standards and if they are also reliable

    The Opening Case: Chinese Accounting highlights the lack of consistency in accounting standards across nations. While China is encouraging companies to adopt the standards used in developed markets, at the moment a very different system is in place making it difficult for investors to understand the financial reports of Chinese firms.

    20-*

    Why Are International
    Accounting Standards Important?

    The growth of transnational financing and transnational investment has created a need for transnational financial reportingmany companies obtain capital from foreign providers who are demanding greater consistencyStandardization of accounting practices across national borders is probably in the best interests of the world economywill facilitate the development of global capital markets

    LO2: Explain the implications of the rise of international accounting standards.

    20-*

    Why Are International
    Accounting Standards Important?

    The International Accounting Standards Board (IASB) is a major proponent of standardization of accounting standardsmost IASB standards are consistent with standards already in place in the U.S.by 2011, 100 nations have adopted IASB standards or permitted their use in reporting financial resultsthe EU has mandated harmonization of accounting principles for membersthere soon could be only two major accounting bodies with substantial influence on global reporting FASB in the U.S. and IASB elsewhere

    Management Focus: The Consequences Of Different Accounting Standards explores the consequences of different accounting standards. When firms from different countries merge, their accounting systems also merge. This can be a complicated process!

    20-*

    How Does Accounting Influence Control Systems?

    The control process in most firms is usually conducted annually and involves three steps

    Subunit goals are jointly determined by the head office and subunit management

    The head office monitors subunit performance throughout the year

    The head office intervenes if the subsidiary fails to achieve its goal, and takes corrective actions if necessary

    LO3: Explain how accounting systems impact upon control systems within the multinational enterprise.

    20-*

    How Do Exchange Rates Influence Control?

    Budgets and performance data are usually expressed in the corporate currencynormally the home currencyfacilitates comparisons between subsidiariesbut, can create distortions in financial statements

    20-*

    How Do Exchange Rates Influence Control?

    The Lessard-Lorange Modelfirms can deal with the problems of exchange rates and control in three ways

    The initial rate

    the spot exchange rate when the budget is adopted

    The projected rate

    the spot exchange rate forecast for the end of the budget picture

    The ending rate

    the spot exchange rate when the budget and performance are being compared

    Lorange and Lessard suggest that firms use the projected spot exchange rate (usually the forward exchange rate) to translate budget and performance figures into the corporate currency.

    20-*

    What Is The
    Lessard-Lorange Model?

    Possible Combinations of Exchange Rates in the Control Process

    20-*

    Why Separate Subsidiary and Managerial Performance?

    Subsidiaries operate in different environments which influence profitabilitythe evaluation of a subsidiary should be kept separate from the evaluation of its managerA managers evaluation should consider the countrys environment for businesstake place after making allowances for those items over which managers have no control

    20-*

    What Is
    Financial Management?

    Good financial management can create a competitive advantagereduces the costs of creating value and adds value by improving customer service Decisions are more complex in international businessdifferent currencies, tax regimes, regulations on capital flows, economic and political risk, etc.

    20-*

    How Do Managers Make Investment Decisions?

    Financial managers must quantify the benefits, costs, and risks associated with an investment in a foreign countryTo do this, managers use capital budgeting involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present valueIf the net present value of the discounted cash flows is greater than zero, the firm should go ahead with the project

    LO4: Discuss how operating in different nations impacts investment decisions within the multinational enterprise.

    20-*

    Why Is Capital Budgeting More Difficult For International Firms?

    Capital budgeting is more complicated in international businessbecause a distinction must be made between cash flows to the project and cash flows to the parent companybecause of political and economic riskbecause the connection between cash flows to the parent and the source of financing must be recognized

    20-*

    What Is The Difference Between Project And Parent Cash Flows?

    Cash flows to the project and cash flows to the parent company can be quite differentParent companies are interested in the cash flows they will receive, not the cash flows the project generatesreceived cash flows are the basis for dividends, other investments, repayment of debt, and so onCash flows to the parent may be lower because of host country limits on the repatriation of profits, host country local reinvestment requirements, etc.

    20-*

    How Does Political Risk
    Influence Investment Decisions?

    Political risk - the likelihood that political forces will cause drastic changes in a countrys business environment that hurt the profit and other goals of a businesshigher in countries with social unrest or disorder, or where the nature of the society increases the chance for social unrestPolitical change can result in the expropriation of a firms assets, or complete economic collapse that renders a firms assets worthless

    Management Focus: Black Sea Energy Ltd examines the collapse of the joint venture between Canadas Black Sea Energy and Russias Tyumen Oil Company. The two companies formed a 50:50 joint venture in 1996, but in 1997, Tyumen was acquired by Russias Alfa Group which quickly determined that despite the operational success of the joint venture, it was one-sided, and needed to be terminated. In the end, Black Sea Energy had to walk away from the deal.

    20-*

    How Does Economic Risk
    Influence Investment Decisions?

    Economic risk - the likelihood that economic mismanagement will cause drastic changes in a countrys business environment that hurt the profit and oth

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