Chapter 20 – Accounting and Finance in the International Business
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Accounting and Finance in the
International Business
Learning objectives
• Discuss the national differences
in accounting standards.
• Explain how accounting
systems affect control systems
within the multinational
enterprise.
• Discuss the different financing
options available to the foreign
subsidiary of a multinational
enterprise.
• Understand the basic techniques
for global money management.
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.
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
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 competitive advantage because it can lower the
cost of activities and enhance the value of activities of a
Google uses to avoid paying corporate taxes on money
earned in Europe—which is perfectly legal.
20
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: Skype Now a Division of Microsoft
Introduction
National Differences in Accounting Standards
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
Chapter Summary
Critical Thinking and Discussion Questions
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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
OPENING CASE: Skype Now a Division of Microsoft
Summary
The opening case describes Microsoft’s acquisition of Internet communications company
Skype in an all-cash deal worth $8.5 billion. The company financed the deal using cash
stored overseas in countries with low corporate tax rates. Discussion of the case can
revolve around the following questions:
QUESTION 1: What were the benefits to Microsoft’s shareholders of using cash held
overseas to purchase Skype?
ANSWER 1: Microsoft used cash held overseas in foreign subsidiaries located in
countries with very low corporate tax rates, which means the company paid minimal
QUESTION 2: Microsoft notes that it would be taxed $9.2 billion, or 31 percent of its
$29.5 billion in cash holdings, if it repatriated its foreign earnings to the United States.
The U.S. corporate tax rate is currently around 35 percent. Explain the discrepancy.
ANSWER 2: Microsoft and other companies have established foreign subsidiaries in
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QUESTION 3: Why does Microsoft continue to hold so much cash overseas, rather than
returning it to the United States? What do you think are the opportunity costs of holding
tens of billions of dollars of cash in foreign locations? What potential benefits might
accrue to Microsoft shareholders if it returned some of that cash to the United States?
ANSWER 3: Holding cash overseas is a business strategy that will allow the company to
QUESTION 4: Do you think it is ethical for companies like Microsoft to continue to hold
cash overseas in order to avoid paying U.S. corporate income taxes? Is this practice
always in the best interests of the company’s shareholders?
ANSWER 4: Companies holding cash outside of the United States are following strictly
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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
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
Five main factors influence the development of a country’s accounting system: (1) the
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.
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.
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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.
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
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.
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
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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.
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 20-28 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 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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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.
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.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Why do the accounting systems of different countries differ? Why do
these differences matter?
ANSWER 1: Accounting systems are shaped by the environment of the country, and
have evolved to meet the nature of demand for accounting information in that country.
Chapter 20 – Accounting and Finance in the International Business
QUESTION 2: Why might an accounting-based control system provide headquarters
management with biased information about the performance of a foreign subsidiary?
How can these biases best be corrected?
ANSWER 2: There are three primary reasons why accounting based control systems may
provide headquarters management with biased information about the performance of a
QUESTION 3: You are the CFO of a U.S. firm whose wholly owned subsidiary in
Mexico manufactures component parts for your U.S. assembly operations. The subsidiary
has been financed by bank borrowings in the United States. One of your analysts told you
that the Mexican peso is expected to depreciate by 30 percent against the U.S. dollar on
the foreign exchange markets over the next year. What actions, if any, should you take?
ANSWER 3: This issue suggests that some interest and principal will have to be repaid in
U.S. dollars in the near future, but the plan was likely to pay this off out of earnings from
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QUESTION 4: You are the CFO of a Canadian firm that is considering building a $10
million factory in Russia to produce milk. The investment is expected to produce net cash
flows of $3 million every year for the next 10 years, after which the investment will have
to close down due to technological obsolescence. Scrap values will be zero. The cost of
capital will be is 6 percent if financing is arranged through the Eurobond market.
However, you have an option to finance the project by borrowing funds from a Russian
bank at a 12 percent. Analysts tell you that due to high inflation in Russia, the Russian
ruble is expected to depreciate against the Canadian dollar. Analysts also rate the
probability of violent revolution occurring in Russia within the next ten years as high.
How would you incorporate these factors into your evaluation of the investment
opportunity? What would you recommend that the firm do?
ANSWER 4: In considering these investments there are three basic steps:
• make a basic analysis
• adjust for economic/political risk
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CLOSING CASE: Google and Its Tax Strategy
Summary
The closing case describes the tax strategy used by Google to set up subsidiaries in
various countries other than the United States to take advantage of the very low corporate
tax rates in those countries. Discussion of the case can revolve around the following
questions:
QUESTION 1: Do you think it is ethical for companies like Google to continue to use
shell companies to avoid paying taxes in higher-tax-rate countries? Is this practice always
in the best interests of the company’s shareholders and customers?
ANSWER 1: Student responses will vary. Some may consider it unethical for a company
based in the United States that benefited from taxpayer-funded infrastructure to
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QUESTION 2: Should the “Double Irish” tactic be outlawed globally and, if so, how
would you go about doing it?
ANSWER 2: Student answers will vary depending on their response to question 1.
QUESTION 3: What about the “Dutch Sandwich” move? Is this too much tactical game
playing for a large company such as Google? Explain.
ANSWER 3: Student answers will again vary depending on their responses to question 1.
QUESTION 4: Since there is no income tax in Bermuda, what does Bermuda gain from
being “home” to Google’s operations in Europe?
ANSWER 4: Countries such as Bermuda and other tax havens gain significant economic
benefits from being home to foreign cash holdings. These countries have developed
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.
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
The inflation rate of a country can affect financial planning in multinational corporations
since the value of receivables in each country can face significant devaluation if the
Chapter 20 – Accounting and Finance in the International Business
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inflation rates are high. Your company has operations in the following countries: Belarus,
Costa Rica, Finland, Iceland, Paraguay, Thailand, and Zimbabwe. Use the Country
Comparator on the globalEDGE site to rank the risk of devaluation of your company’s
receivables from highest to lowest, based on the most recent data available for each
country. What precautions can your company take in the countries at the top of this list to
minimize the risk?
Exercise 1 Answer
Search phrase: Country Comparator
Exercise 2
The top management of your company has requested information on the tax policies of
Argentina. Using the country guide for Argentina on Deloitte International Tax and
Exercise 2 Answer
Search phrase: Deloitte International Tax and Business Guides
Resource Name: Deloitte International Tax and Business Guides
Chapter 20 – Accounting and Finance in the International Business
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End of Part Case Notes
Part Six
Brazil’s Gol Airlines
1. What were the benefits to Gol of a listing on the New York Stock Exchange in addition
to the Sao Paulo Bovespa?
Answer: By listing on the NYSE, Gol was able to build recognition of its business model
2. Why do you think the Gol stock offering was oversubscribed?
Answer: Most students will probably suggest that Gol’s position of being one of the
3. Do you think Gol would have raised as much money if it had just listed on the Sao
Paulo exchange?
Answer: By listing its stock on both the New York Stock Exchange and the Brazilian
4. How might the joint listing of the New York and Sao Paulo stock exchanges affect
Gol’s ability to raise additional capital in the future?
Answer: Gol’s successful stock offering helped propel the company into a tier one airline
in company with other successful firms like Southwest, Ryanair, and JetBlue. Gol now
has an international presence and is in a position to tap global financial markets, and
should find it easier to raise funds in the future.
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Staffing Policy at AstraZeneca
1. What international staffing policy is AstraZeneca pursuing with regard to its high-
potential employees?
Answer: AstraZeneca’s strategy for foreign assignments involves selecting only those
2. Why does AstraZeneca limit this policy to just high-potential employees? Can you see
a drawback in doing this?
Answer: AstraZeneca sends only high potential employees on foreign assignments
because of the high cost involved with expatriates. AstraZeneca believes that it is critical
3. What staffing policy is AstraZeneca adopting with regard to its subsidiaries in places
such as China? Is that an appropriate policy?
Answer: AstraZeneca has found staffing policy particularly challenging in China where
its operations have more than tripled in the last decade. Because skilled employees are
4. Do you think the company is doing enough to limit the well-known risks and costs
associated with high expatriate failure rates? Is there anything else it might do?
Answer: Beginning with its selection process, AstraZeneca devotes considerable
Chapter 20 – Accounting and Finance in the International Business
ensure that an employee’s transition back to the home country is smooth. Most students
will probably applaud the company’s efforts to ensure that its expatriates are successful.