Title: International Accounting
1Chapter 1
- International Accounting
- and
- International Business
2National 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?
3Reasons 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
4Forms 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.
5Multinational 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
6Multinational 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.
7Large 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
8Large 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
9Deciding 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
10Environmental 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.)
11Environmental 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
12Environmental 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)
13Accounting 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
14Major 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
15Corporate 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.)
16Trends 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
17A 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
18Accountability 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?
19Accountability 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
20Accounting 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
21The 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