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International Accounting and International Business

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Title: International Accounting and International Business


1
International Accounting and International
Business
Chapter One
2
  • The basic purpose of accounting is to provide
    useful information to prudent userscreditors,
    investors, and those how advise them.
  • Useful information is reliable and relevant. It
    should be neutral, verifiable, representationally
    faithful, and have predictive value, feedback
    value, and be timely.

3
  • This becomes difficult when dealing with a
    multinational enterprisea corporation with
    foreign operations, foreign transactions, and/or
    users of the financial information that are in a
    different domicile than the reporting entity.

4
  • How many accounting systems do companies use in
    the US?

5
  • External reporting
  • Tax reporting
  • Internal decision-making, including JIT, CPV,
    make/buy decisions, NPV of investments,
    performance evaluations

6
  • So how many accounting systems do you think there
    are internationally?

7
Who Uses Accounting Information?
  • Government
  • Creditors
  • Management
  • Owners (private and public)
  • Neighbors
  • Employees
  • Social and environmental activists
  • Unions
  • Others

8
Why is understanding International Accounting
important?
  • Increasingly internationalized world of business
  • Language and currency are different (even
    terminology!)
  • Types and amount of information disclosed are
    likely to be different

9
  • Procedures followed to determine figures are
    likely to be different and may not be
    explainedvaluation(i.e., historical cost, fair
    market value, discounted cash flows) recognition
    and timing of recognition, and even realization

10
Why would we expect these differences?
  • Differences in culture, business practices,
    political and regulatory structures, legal
    systems, currency value, foreign exchange rates,
    local inflation rates, business risk, sources of
    finance, and tax codes all affect how the MNE
    conducts its operations and how it reports the
    results of those operationsthat is, the
    companys financial reporting..around the world.

11
To think about as we begin this course
  • Why are international accounting issues
    important?
  • Who has access to what information? Is the
    access to governments, creditors, stockholders,
    neighbors, unions, different?
  • Who has the ability to request and receive
    information that might not otherwise be readily
    available?

12
  • What difference does form of business make when
    considering information users and information
    needs? Corporation, sole proprietorship,
    partnership
  • How are financing needs, financing sources, and
    business form related? Where do businesses get
    capital? Family, friends, banks, investors
  • What does this have to do with accounting
    information?

13
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14
World Capital Markets
  • North America
  • New York, San Francisco, Chicago, Toronto
  • Asia
  • Hong Kong, Tokyo
  • Australia
  • Sydney
  • Europe
  • London, Zurich, Frankfurt, Brussels, Milan,
    Paris, Amsterdam, Stockholm, Madrid
  • South America
  • Buenos Aires, Santiago, Mexico City
  • Africa
  • Johannesburg

15
As we become a global economy
  • World capital markets compete for listings
  • Companies increasingly use multiple sources of
    capital
  • Diversify risk
  • Greater access to funds

16
How did we get to where we are today?
17
Historical Development of Accounting
  • Ancient World
  • Mesopotamia, Egypt, India, China, Rome
  • Middle Ages Rise of Double Entry Bookkeeping,
    which seems to have evolved independently in
    different places, responding to the changing
    nature of business transactions and the need to
    record them properly
  • Genoa, Florence, Venice

18
National Differences in Accounting Systems
  • Historical developments did not lead to
    uniformity in international accounting practice
  • Despite similarities, no two systems are exactly
    alike
  • Reasons for Differences
  • Economic,
  • Educational,
  • Legal,
  • Political, and
  • Social/ Cultural Factors

19
Implications of National Differences in
Accounting
  • Acts as a barrier to the free-flow of
    international business information
  • Potential to inhibit efficient allocation of
    resources
  • Potential to increase the cost of capital

20
Evolution and Significance of International
Business
  • Greek Period
  • First international sales of mass-produced
    products through Greece in 5 B.C.
  • Roman Period
  • First open market with political stability,
    better transportation, and few tariffs or
    restrictions
  • Middle Ages
  • Banking, Insurance, and trade fairs in Byzantium

21
The Preindustrial Period
  • Europe Rise of Mercantilism
  • Right to trade regulated by the state,
  • Colonialism driven by states direct investment
    in colonies and near-monopolistic control of
    trade, and
  • Dominated by Western European Nations.

22
The Industrialization Period 1780-1945
  • Technological inventions led to unprecedented
    mass production and standardization,
  • Implementation of large-scale infrastructure
    between historically separate markets, and
  • Birth of large multinational corporations such
    as Singer, Ford, Dunlop, and Lever Brothers.
  • The mass production of goods encouraged (or
    perhaps required) companies to look for new
    markets to take advantage of these economies of
    scale.

23
The Post-World War II Period
  • Great Depression and WWII stunted international
    trade
  • Following the end of the war, demand for products
    and services, trade and investment sharply
    increased.

24
The Multinational Era
  • Involvement in International trade is essential
    for developing nations, and
  • For the continued economic growth of developed
    nations.

25
What is International Business?
  • All business transactions involving two or more
    countries.

26
Reasons for International Involvement
  • Expand sales,
  • Gain access to raw materials and other factors of
    production, and
  • Obtain information, technical expertise (i.e.
    patents, licenses, know-how).

27
Forms of International Involvement
  • Exporting and Importing of goods and services,
  • Strategic alliances including licensing
    agreements, franchises, and joint ventures,
    (McDonalds, Holiday Inn, Pizza Hut), and
  • Direct investment.

28
Global Enterprises
  • Multinational enterprises are those which
  • Have a world-wide view of production, materials,
    components and final markets
  • Have over 10 of sales, assets, earnings, and
    employees abroad.

29
Large MNEs
  • Indicators
  • Sales and Market Value,
  • Profits and Return on Shareholders Equity, and
  • Worldwide stock market valuations.

30
The Decision to Become Global
  • The decision to become global depends on how
    effectively management assesses two different but
    interactive dimensions the external environment
    and the internal capabilities of the firm.

31
The Decision to Become Global External
Environment v. Internal Capabilities
  • Environmental Constraints-Domestic
  • Educational,
  • Sociological (Sociocultural),
  • Political/ Legal, and
  • Economic.
  • Environmental Constraints-International
  • May differ from domestic constraints and mostly
    concerned with nationalism

32
Firm Specific Advantages
  • Intangibles that provide a unique firm advantage,
  • Examples include market-niche capabilities and
    personnel advantages.

33
Accounting Aspects of International Business
  • Accounting requirements differ with each
    successive stage of international involvement,
  • For example, import-export stage would require
    investigation of potential buyer or seller for
    purposes of determining credit-worthiness and
    capacity to perform.
  • Initial Issues may include statements written in
    foreign language, amounts in foreign currencies,
    and information produced using different
    standards.

34
Establishing an Internal International
Accounting Capability
  • Increased international involvement requires
  • Internal accounting resources,
  • Creation of separate organization to handle
    international trade, and
  • Creation of a foreign operation of some kind.
  • Degrees of Involvement
  • International accounting knowledge may be
    necessary even with no direct international
    business involvement (i.e. company needs to
    borrow money or sell stock internationally).

35
The Field of International Accounting
  • Increased need for accountants who understand the
    international accounting environment,
  • International certification possibilities, and
  • Fascinating career opportunities.

36
Capital Markets
  • Accounting plays a critical role in the efficient
    functioning of capital markets (and Enron has
    given us a taste of just how important it is to
    have reliable accounting information if capital
    markets are going to function efficiently)

37
  • The needs of capital market participants have
    strongly shaped the development of accounting
    practice.

38
  • The dollar value of cross-border equity listings
    almost tripled between 1995 and 1999, with over
    US500 billion raised during that 5-year period.
    International offerings in bonds, syndicated
    loans, and other debt instruments also grew
    dramatically during the 1990s.

39
  • From 1998 through 2001, for example, 405 non-U.S.
    firms listed on Nasdaq, raising an average of
    125.5 million each.

40
  • One of the biggest constraints to growth is
    access to capital.

41
  • In previous decades, companies typically listed
    on their home country's stock exchange Firms in
    places such as the United States and Germany had
    an advantage because those two countries had the
    richest capital markets. A company with a good
    product or service and a potentially hefty pool
    of customers was likely to get funded.
  • In contrast, firms in entrepreneurially energetic
    places with smaller stock markets such as Israel
    and India operated at a disadvantage. Simply put,
    there was less money to go around.

42
  • In a survey, Amit and Zott discovered multiple
    reasons for cross-border listings, although
    fundraising predominated. Every firm they
    surveyed listed money as a motive. But about
    two-thirds also wanted to increase their
    international visibility, and a third wanted to
    broaden the geographic distribution of their
    shareholders.

43
  • Companies that list abroad also make useful
    foreign contacts and improve their familiarity
    with foreign consumers and competitors, Amit and
    Zott point out. That, in turn, can help them
    boost their foreign sales and market share.
    That's especially important for, say, an Israeli
    firm listing on Nasdaq because Israel's economy
    is dwarfed by the United States'.

44
  • Hundreds of foreign issuers have had their equity
    listed on European, North American, and Japanese
    equity markets for years.
  • WHY?

45
  • At the same time, there is a growth in listings
    on some of Europes new marketsmarkets
    designed to meet the needs of young, high-growth
    companies seeking new capital.
  • More flexible listing standards, but their
    financial reporting and corporate governance
    standards are often more STRINGENTwhy? RISK!

46
Major Equity Markets
  • North America, especially NYSE and NASDAQ
  • AsiaJapan, PRC, Asian Tigers of Singapore,
    Hong Kong, Taiwan, Thailand
  • Market meltdown of July, 1997
  • Critics suggest that Asian accounting and
    political practices deter potential investors.

47
  • Western Europe is now the second largest equity
    market in terms of market capitalization and
    trading volume. There was dramatic growth of
    many Western European markets in the second half
    of the 1990s.
  • Economic growth
  • Shift toward equity financing (as opposed to
    government ownership or debt)

48
  • The growth of an equity culture in Europe has
    encouraged the equity markets in the European
    countries to become more similar.
  • This convergence is one step toward market
    integration, when location is no longer a
    relevant variable
  • However, European markets are still fragmented,
    and cross-border trading is still expensive,
    which is a barrier to integration.

49
Fragmentation
  • Decreased by technology and competition
  • Increased by language, culture, legal, tax, and
    market regulation differences
  • In Europe, the threat and the promise of the
    European Unionnationalism, vs. integration and
    the power of size

50
Reasons for cross-border listings
  • Broaden the shareholder base
  • Promote awareness of products
  • Promote awareness of the company
  • Are these goals met?
  • Not usually Thinly traded listings, few local
    shareholders, and decreasing number of listings

51
Stock Exchange Alliances and Mergers
  • Alliances and mergers have made the European
    capital market interactions complex
  • Alliances involve the sharing of various stock
    exchange functions including marketing, listing,
    order routing, information dissemination, order
    execution, matching, clearing, settlement, and
    administration

52
  • The impetus is cost containment, which would lead
    to a competitive advantage
  • The alliances are to benefit each participant,
    but the participants are rivals, which is a
    barrier to cooperation

53
What are the current issues?
  • International accounting standards (IFRS)
  • Formerly called IASs.

54
  • http//www.iasplus.com/country/useias.htm
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