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International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
1 Instructor’s Manual – Module 2 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
Module 15: International Accounting and Financial
Management
Use this Instructor Guide to incorporate the unique content of this product and facilitate your
Face-to-Face, Online, and Hybrid classes. This guide has been designed to be interactive and links
have been created within each title in the Table of Contents to guide you to each section. You
can also link back to the main page by clicking at the button at the bottom of each page.
Here is the Table of Contents highlighting what you’ll be able to find to support you in teaching
this module:
YOUR CONTENT
Summary
Learning Objectives
Key Terms & Key Terms with Definitions
Content Outline
CONNECT TOOLS FOR CLASS PREPARATION
SmartBook
What is SmartBook?
How Does SmartBook Help You/Students?
How to assign SmartBook to ensure students come to class prepared?
ENGAGEMENT & APPLICATION (FACE TO FACE & ONLINE & HYBRID)
BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS
IB IN PRACTICE
GLOBAL DEBATE
GET THAT JOB! FROM BACKPACK TO BRIEFCASE
Critical Thinking Questions
Global Edge Research Task
MiniCase
Bonus Activities
Video Suggestions
Team Exercises
Supplemental Lecture
Tools & Tricks
Controversial Issues
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
2 Instructor’s Manual – Module 15| Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
CONNECT TOOLS FOR ASSESSEM ENT OF LEARNING
Interactive Applications
Assigning Interactives
Time-Saving Hints:
Connect Content Matrix
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
3 Instructor’s Manual – Module 15| Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
YOUR CONTENT
SUMMARY
This chapter examines accounting as a fundamental tool of financial management. We look at
the differences in standards among nations and their progress towards convergence. Then we
look at the capital structure of the firm and cash management, including techniques such as
multilateral netting and approaches to managing currency fluctuations.
The lack of a global currency creates foreign exchange risk for international companies. Finance
and accounting managers have tools to help mitigate various risks associated with foreign
exchange risk, including hedging, exposure netting, price adjustment, balance sheet neutralizing,
and swaps. We also look at an additional financial force with which international managers must
contend, taxation.
LEARNING OBJECTIVES
LO 15-1 Outline the major accounting issues international firms face when operating in
foreign currencies.
LO 15-2 Outline the benefits and limitations of 3BL.
LO 15-3 Compare the capital structure choices open to international firms and their
significance.
LO 15-4 Describe why ICs move funds and the utility of an international finance center.
LO 15-5 Identify foreign exchange risks the IC faces and ways to address them.
LO 15-6 Describe taxation as an international financial force.
KEY TERMS AND DEFINITIONS
American depository receipts
(ADRs) (p. 400)
Foreign shares held by a custodian, usually a U.S. bank, in the
issuer’s home market and traded in dollars on the U.S.
exchange
branch (p. 411)
Legal extension of the parent company
consolidation (p. 395)
Describe taxation as an international financial force.
current rate method (p. 395)
An approach in foreign currency translation in which assets and
liabilities are valued at current spot rates
currency option hedge
(p. 407)
An option to buy or sell a specific amount of foreign currency
at a specific time in order to protect against foreign currency
risk
economic exposure (p. 409)
The potential for the value of future cash flows to be affected
by unanticipated exchange rate movements
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
forward market hedge
(p. 407)
Foreign currency contract sold or bought forward to protect
against foreign currency movement
fronting loan (p. 403)
A loan made through an intermediary, usually a bank, from
parent company to subsidiary
functional currency (p. 395)
The primary currency of a business
hedge (p. 404)
To hold assets (to take a position) in one market in order to
offset exposure to price changes in an opposite position
income tax (p. 409)
Direct tax levied on earnings
leading and lagging (p. 405)
Timing payments early (lead) or late (lag), depending on
anticipatedcurrency movements, so that they have the most
favorable impactfor the company
money market hedge (p. 407)
A method to hedge foreign currency exposure by borrowing
and lending in the domestic and foreign money markets
multilateral netting (p. 404)
Strategy in which subsidiaries transfer net intracompany cash
flows through a centralized clearing center
offshore financial center
(p. 401)
Location that specializes in financing nonresidents, with low
taxes and few banking regulations
subsidiary (p. 411)
Separate legal entity owned by the parent company
swap contract (p. 407)
A spot sale/purchase of an asset against a future purchase/sale
of an equal amount in order to hedge a financial position
temporal method (p. 395)
An approach in foreign currency translation in which monetary
accounts are valued at the spot rate and accounts carried at
historical cost are translated at their historic exchange rates
transaction exposure (p. 406)
Change in the value of a financial position created by foreign
currency changes between the establishment and the
settlement of a contract
transfer pricing (p. 403)
Pricing that is established for transactions between members
of the enterprise
translation exposure (p. 408)
Potential change in the value of a company’s financial
positiondue to exposure created during the consolidation
process
value-added tax (VAT)
(p. 409)
Indirect tax collected from the parties as they add value to the
product
withholding tax (p. 411)
Indirect tax paid by the payor, usually on passive income
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
5 Instructor’s Manual – Module 2 | Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
CONTENT OUTLINE
The following section provides the flow of information using the LEARNING OBJECTIVES as a
guide, KEY TERMS learners will need to take away from the course and a notation of when to use
POWERPOINT SLIDES with LECTURE NOTES to drive home teaching points.
LO 15-1
Outline the major accounting issues international firms face
when operating in foreign currencies.
• Purpose of international accounting: to provide
managers with data
• Foreign currency transactions raise issues in two
situations: operating in foreign currency and
consolidation
o Two rate methods: current and temporal
o Use hinges on functional currency, the
currency of the business
• U.S. and rest of world accounting systems on path of
convergence
• Accounting affected by culture
Key Terms:
• consolidation
• current rate method
• temporal method
• functional currency
I. Purpose of International accounting is to provide managers the data they need to make
decisions and provide people outside the organization the information they need
(governments, suppliers, investors)
II. Foreign currency issues come up in only two situations
A. When business operates in foreign currency, (sales, loans, purchases), that transaction
needs to be translated into the home country currency (consolidation)
B. Two approaches to translation: (See Fig. 15.1)
1. current rate, when the translation uses the spot rate
2. temporal rate, when the translation uses an historic rate for some translations and
spot rate for others.
3. depends on the currency in which the business is conducted (functional currency)
III. There are two basic accounting standards
A. The U.S. Financial Accounting Standards Accounting Board (FASB), under the supervision of
the SEC, provides generally accepted accounting principles (GAAP)
B. The International Accounting Standards Board (IASB), whose standards are the
International Financial Reporting Standards (IFRS), used by the rest of the world
C. Convergence towards IFRS is underway, but a slow process. GAAP based on rules and
regulations; IFRS on principles
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
6 Instructor’s Manual – Module 15| Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
IV. Accounting affected by culture
A. Assumptions that underlie the history, legal sand political systems influence accounting
B. The understanding of accounting varies by culture: to control and prevent dishonesty or to
facilitate good decisions and record value? (See Fig. 15.2)
LO 15-2
Outline the benefits and limitations of 3BL.
• Provides a way to report environmental, social and
economic impacts
• Key information in developing sustainable business
• Benefits and limitations
o Allows results to be shared with internal and
external stakeholders
o Provides data for assessing trends
o 3 BL not comparable across businesses
Key Terms:
I. 3 BL is a way business can report its environmental, social and economic impacts
A. This is a key step in developing sustainable approaches
B. There are benefits and limitations
1. Benefits
a. Allows the results to be shared with external stakeholders
b. Provides data necessary for assessing effects and trends within the business
2. Limitations
c. Not the right approach because measures not comparable across businesses
d. Need objective measures that allow for comparability
LO 15-3
Compare the capital structure choices open to international
firms and their significance.
• Firm raises capital from two sources
o internal (retained earnings )
o external (equity or debt)
• Increasing use of foreign stock markets
o Issuing stocks in foreign markets
o Use of ADRs
o Concerns re foreign control
Key Terms:
• American
depository receipts
(ADRs)
• offshore financial
centers
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
7 Instructor’s Manual – Module 15| Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
• Increasing use of foreign debt markets
o trend to tap local markets first
o role of offshore financial centers
• Balance of debt to equity influenced by local practice
• Decisions related to raising capital
o What currency?
o Balance between equity and debt?
o What sources of capital are there?
o Which are lowest cost markets?
o Are other sources available?
o How much and for how long?
I. Firms raise capital from two sources
A. Internal sources, retained earnings
B. External sources, equity or debt
II. Increasing use of foreign stock markets
A. Firms issue stock on foreign exchanges directly or use ADRs (in U.S. market)
B. Control by foreigners is a concern, esp. in sensitive industries
III. Increasing use of foreign debt markets
A. Trend is to tap local markets first
B. Offshore financial centers may also be a source of capital
IV. Balance of debt to equity is influenced by local practice
A. UK, U.S. and Canada tend to rely more on equity
B. Many other countries, incl. Japan and Germany, tend to rely more on debt (Japanese
keiretsu)
V. Decisions made by a financial manager related to raising capital include
A. In what currency should the capital be raised, considering estimates of longterm strengths
and weakneses?
B. How should the capital be structured between equity and debt?
C. What sources of capital are available? (bank loan, swap, bond issue, IPO, issuance of
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
8 Instructor’s Manual – Module 15| Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
additional stock, etc.)
D. If using a capital market, which one?
E. Are other sources of many available? (JV partner, private financing, host government)
F. How much money and for how long?
LO 15-4
Describe why ICs move funds and the utility of an international
finance center.
• Why firms move funds
o dividends, royalties, payments of loans, transfer
pricing
o moving of funds may serve as way to manage
cash flows (blocked funds, away from high tax
areas, reduce FX risk)
• Techniques for moving funds
o Fronting loan from parent to subsidiary, using
bank as intermediary
o Transfer pricing
• Utility of international finance center (firm’s
centralized finance operations) due to
o volatility of floating exchange rates
o growth in number of FX and capital markets
o differing inflation rates among markets
o ability to transfer funds electronically
o use of idle cash generates profits
o growth of derivatives to protect against risks
• Finance center techniques
o Hedging –holding of assets in one market to
offset exposure in another
o multilateral netting—centralized clearing center
o leading and lagging
Key Terms:
• fronting loan
• transfer pricing
• hedge
• multilateral netting
• leading and lagging
I. Why Firms Move Funds
A. Firms move funds to make royalty payments, pay dividends, pay loans, pay for intra-firm
transfers ( via transfer pricing)
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
9 Instructor’s Manual – Module 15| Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
B. As they move funds, firms also can achieve cash flow management objectives
1. dealing with funds whose repatriation is blocked
2. achieving tax management objectives by locating profits in low-tax environments
3. reducing foreign exchange risk by moving away from areas that have high risk of
devaluation
II. Techniques for moving funds
A. Fronting loan, from parent to subsidiary, uses bank as intermediary as way to avoid host
government intra-firm transfer limitations
B. Transfer pricing (on internal sales) allows firm to move funds from high-tax, high risk
environments to lower risk, lower tax ones. Also firm may avoid tariffs and currency transfer
controls.
1. may raise ethical issues
2. not in spirit of host country law
III. Usefulness of international finance center, a centralization of finance operation as a profit
center (like company bank)
A. Helpful in managing volatility of floating exchange rates
B. Useful in accessing growing number of FX and capital markets
C. Helpful in hedging the risks related to differences in inflation rates among markets
D. Supported by development of electronic funds transfer capabilities
E. Management of idle cash can generate profits
F. Use of derivatives (contracts whose values are derived from the value of underlying assets)
have developed as a way to manage risks
IV. Techniques used by international finance centers
A. Multilateral netting—using a central clearing house for funds transfers among HQ and
subsidiaries
1. reduces transactions costs
2. reduces FX costs
3. allows firm to benefit from investment of idle funds
B. Leading and lagging—timing payments early or late, depending on anticipated currency
movements
LO 15-5
Identify foreign exchange risks the IC faces and ways to
address them.
• Three types of exchange risks
o Transaction exposure, addressed via
o leading/lagging
o exposure netting
Key Terms:
• transaction exposure
• forward market hedge
• currency option hedge
• money market hedge
International Business
Geringer, McNett, Minor, Ball
Instructor Guide to Module 15
10 Instructor’s Manual – Module 15| Geringer, McNett, Minor, Ball © 2016 by McGraw-Hill Education.
o forward market hedge
o currency option hedge
o money market hedge
o swap contract
o Translation exposure-mostly not addressed
o Economic exposure—firm-wide and long-term
• swap contract
• translation exposure
• economic exposure
There are three types of exchange risks or exposures, transaction, translation and economic.
A. Transaction exposure arises when the firm has transactions in a foreign currency and the
FX rate changes between when the commitment is made and when it is payable. Here
are ways to address transaction exposure:
1. Leading or lagging a payment or its collection, depending on the anticipated FX
movement
2. Exposure netting—similar to multilateral netting, a centralized clearing that matches
exposures
3. Forward market hedge—FX contract (buy or sell) bought forward to protect against
FX movement
4. Currency option hedge—an option to buy or sell a specific amount of currency at a
specific time in the future
5. Money market hedge—matching exposures by borrowing and lending in the
domestic money markets
6. Swap contract—agreement to exchange currencies at specific rates and on a
specified date. May be undertaken for longer periods than other hedging
transactions.
B. Translation exposure is mostly not hedged because it does not represent cash flow.
(Hedging can increase transaction exposure.)
C. Economic exposure –at operations level and results from FX rate changes on future cash
flows. It is firm-wide and long-term.
1. Hedging and swap contracts may be used
2. Flexibility on foreign sourcing and portfolio approach to foreign market involvement
also helpful
LO 15-6
Describe taxation as an international financial force.
• Tax affects revenues and is an external force
• Three types
Key Terms:
• income tax
• value-added tax (VAT)
