International Accounting - PowerPoint PPT Presentation

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International Accounting

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Franchise agreement (Holiday Inn, McDonald's) Use of trademark with brand name recognition ... Just a part of global operations ... – PowerPoint PPT presentation

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Title: International Accounting


1
Chapter 1
  • International Accounting
  • and
  • International Business

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?

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

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, McDonalds)
  • 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.

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 companys overall
    assets, earnings, and employees are abroad
  • Significant geographical spread
  • International experience of executives

6
Multinational Enterprises
Firm Size and Saturation of Domestic Market
Probability of International Transactions
  • Small companies (esp high tech firms)
  • Export and import
  • Manufacture products abroad or outsource
    production (Accounting firms with India?)
  • Licensing agreements.

7
Large Multinational Enterprises
Top 10 Companies by Market Value in 2004 Top 10 Companies by Market Value in 2004 Top 10 Companies by Market Value in 2004 Top 10 Companies by Market Value in 2004 Top 10 Companies by Market Value in 2004
Source Business Week Global 1000 Source Business Week Global 1000 Source Business Week Global 1000 Source Business Week Global 1000 Source Business Week Global 1000
Rank Rank Name Country Market Value
2004 2003 Name Country ( 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
8
Large Multinational Enterprises
Top 10 Companies by Sales in 2003 Top 10 Companies by Sales in 2003 Top 10 Companies by Sales in 2003 Top 10 Companies by Sales in 2003 Top 10 Companies by Sales in 2003
Source Fortune Global 500 Source Fortune Global 500 Source Fortune Global 500 Source Fortune Global 500 Source Fortune Global 500
Rank Rank Name Country Sales
2003 2002 Name Country ( 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. 164.51
7 7 DaimlerChrysler Germany 156.60
8 8 Toyota Motor Japan 153.11
9 9 General Electric U.S. 134.18
10 14 Total France 118.44
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

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.)

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

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)

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

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

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.)

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 Exchanges total trading
    volume
  • Consolidation of European exchanges
  • Exchanges in developing countries are growing

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

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 countrys view
  • Business activities of an MNE are of primary
    concern Why? How does host country benefit?

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 ruleshot button for U.S. Tax

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

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
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