CHAPTER 13
STRATEGIC ACCOUNTING ISSUES IN MULTINATIONAL
CORPORATIONS
Chapter Outline
I. The strategic issues faced by a MNC are related to strategy formulation and strategy
implementation.
A. Strategy formulation is the process of deciding on the goals of the organization and
plans for attaining those goals, whereas strategy implementation refers to the process
by which managers influence others within the organization to behave in accordance
with those goals.
B. Capital budgeting is an important activity associated with strategy formulation, and
strategies are implemented mainly through operational budgeting and performance
evaluation. Accounting plays a major role in these activities as a source of information.
II. Accounting provides quantitative information about (a) opportunities and threats as well as
strengths and weaknesses, and (b) costs and benefits needed for long-term
investment (or capital budgeting) decisions.
A. Techniques such as payback period, return on investment (ROI), net present value
(NPV), and internal rate of return (IRR) are employed in making long-term investment
decisions.
B. All capital budgeting techniques compare estimates of future cash flows with the cost
of the investment.
C. NPV and IRR take the time value of money into consideration by calculating the
present value of future cash flows in evaluating potential capital investments.
D. Preferences for using particular capital budgeting techniques vary across countries
due to cultural and other reasons.
E. In calculating future cash flows from foreign investments, MNCs should consider
various risks associated with them, namely, political risk, economic risk, and financial
risk.
F. MNCs tend to evaluate foreign investments from both project and parent viewpoints.
III. Accounting provides tools for implementing strategies and monitoring their effectiveness
through the development of operating budgets.
A. Operating budgets help express a firm’s long-term strategy within shorter time frames
and specify criteria for monitoring progress.
B. It is important for MNCs to translate operating budgets of foreign subsidiaries using an
appropriate exchange rate.
IV. Accounting provides tools for evaluating organizational effectiveness in fulfilling its
objectives, and at the same time for motivating organizational members to behave in a
manner consistent with the organization’s goals.
A. The level of performance depends on many factors, and no single measure can
incorporate all of them. Therefore, it is common for MNCs to use a mixture of
measures, financial and non-financial, formal and informal, and formula-based and
subjective in evaluating performance.
B. MNCs do not seem to use any particular measure consistently for evaluating
performance. V. Performance evaluation in MNCs is complicated by exchange rate
fluctuations, varying rates of inflation in foreign countries, international transfer pricing,
and cultural and environmental differences that exist across countries.
A. A potential problem for MNCs is the tendency for headquarters to rely on simple
financial control systems, often designed for home country operations and extend
them to foreign subsidiaries.
B. The financial measures used to evaluate performance, such as sales growth, cost
reduction, profit and return on investment, are provided through the accounting
system.
C. MNCs also use non-financial measures, such as market share, relationship with host
country government, to evaluate performance, and such measures are not based
on information obtained directly from financial statements.
VI. The method of evaluation used depends largely on the type of subsidiary involved, for
example, its strategic role within the MNC and its organizational culture.
VII. The importance of non-financial measures in evaluating performance is reflected in the
growing popularity of the balanced scorecard approach, focusing on integrating the key
elements of a business, vision strategy, and four perspectives, namely, financial, customer,
internal business process, and learning and growth.
VIII. In evaluating the performance of a foreign subsidiary, important questions include: whether
to separate managerial performance from the unit performance; and how to separate
controllable items and non-controllable items.