Chapter 20 – Accounting and Finance in the International Business
Accounting and Finance in the
International Business
Learning objectives
Discuss the national differences in accounting standards.
Explain the implications of the rise of international accounting standards.
Explain how accounting systems impact upon control systems within the
multinational enterprise.
Discuss how operating in different nations impacts investment decisions within the
multinational enterprise.
Discuss the different financing options available to the foreign subsidiary of a
multinational enterprise.
Understand how money management in the international business can be used to
minimize cash balances, transaction costs, and taxation.
Understand the basic techniques for global money management.
This chapter deals with accounting and financial management in international business. It
illustrates and explains how accounting decisions, investment decisions, financing
decisions, and money management decisions are complicated by different currencies,
different tax regimes, different levels of political and economic risk, and so on.
Accounting, the language of business, provides the means for firms to communicate their
financial positions to investors, creditors, and the government. Financial information also
is used in making resource allocations.
International businesses are confronted with a number of accounting challenges that do
not arise in the case of domestic businesses. They must prepare reports for international
constituencies and translate and consolidate information across countries and currencies.
Financial managers must also account for all of these factors when deciding which
activities to finance, how best to finance those activities, how best to manage the firm’s
financial resources, and how best to protect the firm from political and economic risks,
including foreign exchange risk. Good financial management can be a source of
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Chapter 20 – Accounting and Finance in the International Business
competitive advantage because it can lower the cost of activities and enhance the value of
activities of a firm.
The opening case discusses Microsoft’s acquisition of Skype and how the company
financed the purchase with cash held overseas in countries with very low corporate tax
rates. The closing case describes the tax strategy Google uses to avoid paying corporate
taxes on money earned in Europe—which is perfectly legal.
OUTLINE OF CHAPTER 20: ACCOUNTING AND FINANCE IN THE
INTERNATIONAL BUSINESS
Opening Case: Skype Now a Division of Microsoft
Introduction
National Differences in Accounting Standards
International Accounting Standards
Management Focus: Chinese Accounting
Accounting Aspects of Control Systems
Exchange Rate Changes and Control Systems
Transfer Pricing and Control Systems
Separation of Subsidiary and Manager Performance
Financial Management: The Investment Decision
Capital Budgeting
Project and Parent Cash Flows
Adjusting for Political and Economic Risk
Management Focus: Black Sea Oil and Gas Ltd.
Risk and Capital Budgeting
Financial Management: The Financing Decision
Financial Management: Global Money Management
Minimizing Cash Balances
Reducing Transaction Costs
Managing the Tax Burden
Moving Money across Borders
Chapter Summary
Critical Thinking and Discussion Questions
Closing Case: Google and Its Tax Strategy
CLASSROOM DISCUSSION POINT
Ask students about the accounting system in the United States. Why is it mandatory for
companies to abide by the system? Then, ask students to take the perspective of an
investor. How does the system in the United States help investors? Try to focus on issues
like reliability and comparability. Then, ask students how they might assess a company
from another country that follows a different accounting system. What happens to
reliability and comparability? Finally, ask students to consider the need for an
international accounting system. What issues could emerge in the development of such a
system? Next, ask students to consider the role of international finance in building and
sustaining a competitive advantage in global markets. Set up an example of a
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Chapter 20 – Accounting and Finance in the International Business
multinational firm with multiple cash flows in various currencies. Then, ask students how
to manage all of the accounts payable and receivable. Challenge students to consider the
costs involved in converting currencies and the foreign exchange exposure incurred.
LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slides 20-3 What Is Financial Management?
Financial management focuses on three types of decisions: investment, financing, and
money management. In international business, currencies, tax regimes, regulations on
capital flows, norms for the financing of business, levels of economic and political risk
all influence these decisions.
Slides 20-4 What Is Accounting?
Accounting is the language of business—it is the way firms communicate their financial
positions.
Slides 20-5 Determinants of National Accounting Standards
Accounting is shaped by the environment in which it operates. In each country the
accounting system has evolved in response to the nature of the demands for accounting
information.
Five main factors influence the development of a country’s accounting system: (1) the
relationship between business and the providers of capital; (2) political and economic ties
with other countries; (3) levels of inflation; (4) the level of a country’s development; and
(5) the prevailing culture in a country.
Slide 20-6 Relationship between Business and Providers of Capital
Three main external sources of capital for business enterprises are: (1) individual
investors, (2) banks, and (3) government.
Slide 20-7 Political and Economic Ties with Other Countries
Similarities in accounting systems across countries can reflect political or economic ties.
Slide 20-8 Level of Development
Developed nations tend to have more sophisticated accounting systems than developing
countries.
Slide 20-9 Accounting and Auditing Standards
Accounting standards are rules for preparing financial statements—they define useful
accounting information.
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Chapter 20 – Accounting and Finance in the International Business
Auditing standards specify the rules for performing an audit—the technical process by
which an independent person gathers evidence for determining if financial accounts
conform to required accounting standards and if they are reliable.
Slides 20-10 and 20-11 International Standards
Because of national differences in accounting and auditing standards, comparability of
financial reports from one country to another is difficult.
There has been a substantial effort recently to harmonize accounting standards across
countries. The International Accounting Standards Board (IASB) is a major
proponent of standardization.
Another Perspective: To see a complete summary of the accounting standards already set
forth, and current efforts at developing new standards, go to the IASB’s web site at
{http://www.iasb.org/Home.htm}.
Slide 20-12 Accounting Aspects of Control Systems
The control process in most firms is usually conducted annually and involves three steps:
1. Subunit goals are jointly determined by the head office and subunit management
2. The head office monitors subunit performance throughout the year
3. The head office intervenes if the subsidiary fails to achieve its goal, and takes
corrective actions if necessary
Slide 20-13 Exchange Rate Changes and Control Systems
Most international firms require budgets and performance data to be expressed in the
corporate currency-normally the home currency.
Slides 20-14 and 20-15 The Lessard–Lorange Model
Lorange and Lessard suggest that firms use the projected spot exchange rate (usually
the forward exchange rate) to translate budget and performance figures into the corporate
currency.
Slide 20-16 Separation of Subsidiary and Manager Performance
The evaluation of a subsidiary should be kept separate from the evaluation of its manager.
Slides 20-17 through 20-19 Investment Decisions
Financial managers must quantify the benefits, costs, and risks associated with an
investment in a foreign country.
Capital budgeting quantifies the benefits, costs, and risks of an investment.
Slide 20-20 Project and Parent Cash Flows
For the parent company, the key figure is the cash flows it will receive, not the cash flows
the project generates because received cash flows are the basis for dividends, other
investments, repayment of debt, and so on.
Slides 20-21 through 20-23 Adjusting for Political and Economic Risk
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Chapter 20 – Accounting and Finance in the International Business
The analysis of a foreign investment opportunity includes an assessment of political and
economic risk.
Political risk is the likelihood that political forces will cause drastic changes in a
country’s business environment that hurt the profit and other goals of a business.
Economic risk is the likelihood that economic mismanagement will cause drastic
changes in a country’s business environment that hurt the profit and other goals of a
business.
Slides 20-24 through 20-27 Global Money Management
Firms must consider two factors when considering financing options:
1. How the foreign investment will be financed
2. How the financial structure of the foreign affiliate should be configured
The cost of capital is typically lower in the global capital market than in many domestic
markets.
The mix of debt and equity used to finance a business varies across countries. Japanese
firms rely far more on debt financing than do most U.S. firms.
Money management decisions attempt to manage global cash resources efficiently.
Firms face a dilemma—when they invest in money market accounts they have unlimited
liquidity, but low interest rates, and when they invest in long-term instruments they have
higher interest rates, but low liquidity.
Transaction costs are the cost of exchange. Every time a firm changes cash from one
currency to another, they face transaction costs. Most banks also charge a transfer fee for
moving cash from one location to another.
Slides 20-28 and 20-29 Global Money Management: The Tax Objective
Double taxation occurs when the income of a foreign subsidiary is taxed by the
host-country government and by the home-country government.
A tax credit allows an entity to reduce the taxes paid to the home government by the
amount of taxes paid to the foreign government.
A tax treaty between two countries is an agreement specifying what items of income will
be taxed by the authorities of the country where the income is earned.
A deferral principle specifies that parent companies are not taxed on foreign source
income until they actually receive a dividend.
A tax haven is a country with a very low, or no, income tax – firms can avoid income
taxes by establishing a wholly-owned, non-operating subsidiary in the country.
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Chapter 20 – Accounting and Finance in the International Business
Another Perspective: To learn more about how companies use tax havens go to
{http://www.businessweek.com/magazine/content/10_44/b4201043146825.htm} and
{http://www.businessweek.com/magazine/content/11_16/b42240B8473886.htm}.
Slide 20-30 Think Like a Manager: Tax Havens
Slide 20-31 Moving Money Across Borders: Attaining Efficiencies and Reducing Taxes
Firms transfer liquid funds across borders as dividend remittances, royalty payments and
fees, transfer prices, and fronting loans.
Slide 20-32 Dividend Remittances
The most common method of transferring funds from subsidiaries to the parent is through
dividends.
Slide 20-33 and 20-34 Royalty Payments and Fees
Royalties represent the remuneration paid to the owners of technology, patents, or trade
names for the use of that technology or the right to manufacture and/or sell products
under those patents or trade names.
A fee is compensation for professional services or expertise supplied to a foreign
subsidiary by the parent company or another subsidiary.
Slides 20-35 and 20-36 Transfer Prices
Transfer prices can be used to position funds within an international business.
Slides 20-37 and 30-38 Fronting Loans
Fronting loans circumvent host government restrictions on the remittance of funds and
have certain tax advantages.
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
Please click here to visit our International Business Video Library on Pinterest, which is
updated on a monthly basis. While there, be sure to “like” the clips that work well for
you, and add notes that might be helpful to your colleagues.
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McGraw-Hill Education.