Chapter 20 ‒ Accounting and Finance in the International Business
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Accounting and Finance in the
International Business
Learning objectives
• Explain the implications of the rise of
international accounting standards.
• Explain how accounting systems affect
control systems within the
multinational enterprise.
• Discuss how operating in different
nations affects investment decisions
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
This chapter deals with accounting and
financial management in international business.
It illustrates and explains how accounting
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
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
a firm.
The opening case discusses the success of
South African food retailer, Shoprite Group.
20
Chapter 20 ‒ Accounting and Finance in the International Business
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The company has seen rapid expansion and
now has revenues of about $11 billion U.S.
dollars. The closing case explores electric
carmaker Tesla’s, rapid growth. The company
has been particularly successful in the
European Union where government subsidies
to buyers of electric cars have helped to make
its products competitive.
Chapter 20 ‒ Accounting and Finance in the International Business
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OUTLINE OF CHAPTER 20: ACCOUNTING AND FINANCE IN THE
INTERNATIONAL BUSINESS
Opening Case: Shoprite—Financial Success of a Food Retailer in Africa
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
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: Tesla, Inc.—Subsidizing Tesla Automobiles Globally
Chapter 20 ‒ Accounting and Finance in the International Business
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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
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.
OPENING CASE: Shoprite—Financial Success of a Food Retailer in Africa
Summary
The opening case describes the expansion and operations of South Africa’s largest food
retailer, Shoprite Group. Shoprite attributes its success to control of its supply chain, its
investment in employee skills, its investment in infrastructure, and its focus on value-
added services that complement the shopping experience. Discussion of the case can
begin with the following questions:
QUESTION 1: Why is Shoprite’s wide product range important to its financial strategy?
ANSWER 1: Shoprite is Africa’s largest food retailer; however, in addition to food
QUESTION 2: What is the role of customer satisfaction in Shoprite’s financial
management strategy?
ANSWER 2: For Shoprite, ensuring that its customers are satisfied with their shopping
QUESTION 3: In addition to its commitment to providing the lowest prices to customers
Chapter 20 ‒ Accounting and Finance in the International Business
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ANSWER 3: Shoprite donates food valued at about $9 million every year and in addition,
Another Perspective: For more information on Shoprite’s strategy in Africa, go to:
{https://qz.com/833966/the-grocery-chain-that-became-africas-biggest-retailer-by-
betting-on-its-middle-class/} and {https://www.shopriteholdings.co.za/group.html}.
LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips and additional perspectives.
Slide 20-4 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, and levels of economic and political
risk all influence these decisions.
What Is Accounting?
Accounting is the language of business—it is the way firms communicate their financial
positions.
Slide 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.
Slides 20-6 – 20-7 International Standards
Because of national differences in accounting and auditing standards, comparability of
financial reports from one country to another is difficult.
Chapter 20 ‒ Accounting and Finance in the International Business
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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:
{https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb} and {http://www.ifrs.org/}.
Slides 20-8 – 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.
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 20-13 – 20-18 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.
Political risk is the likelihood that political forces will cause drastic changes in a
Chapter 20 ‒ Accounting and Finance in the International Business
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McGraw-Hill Education.
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.
Slide 20-19 The Financing Decision and 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.
Slides 20-20 ‒ 20-26 Global Money Management
Money management decisions attempt to manage global cash resources efficiently by
minimizing cash balances, reducing transaction costs, and minimizing the corporate tax
burden.
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.
Another Perspective: To learn more about tax havens go to:
{https://www.bloomberg.com/news/features/2017-11-15/the-final-days-of-a-tax-haven}