International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
15-1
Module 15: International Accounting and Financial
Management
YOUR CONTENT
Summary
Learning Objectives
Key Terms and Definitions
Content Outline
ENGAGEMENT & APPLICATION
Boxed Text Discussion Questions with Suggested Answers
End of Module Exercises
Critical Thinking Questions
globalEDGE Research Task
MiniCase
Bonus Activities
CONNECT TOOLS FOR ASSESSEMENT OF LEARNING
Connect Content Matrix
Connect Activities
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
15-2
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
LEARNING OBJECTIVES
LO 15-1 Outline the major accounting issues international firms face when operating in
foreign currencies.
LO 15-3 Compare the capital structure choices open to international firms and their
significance.
LO 15-5 Identify foreign exchange risks the IC faces and ways to address them.
KEY TERMS AND DEFINITIONS
American depository receipts
(ADRs) (p. 418)
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. 427)
Legal extension of the parent company
consolidation (p. 413)
Describe taxation as an international financial force
currency option hedge
(p. 425)
An option to buy or sell a specific amount of foreign currency
at a specific time in order to protect against foreign currency
risk
current rate method (p. 413)
An approach in foreign currency translation in which assets and
liabilities are valued at current spot rates
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
15-3
economic exposure (p. 427)
The potential for the value of future cash flows to be affected
by unanticipated exchange rate movements
forward market hedge
(p. 424)
Foreign currency contract sold or bought forward to protect
against foreign currency movement
fronting loan (p. 420)
A loan made through an intermediary, usually a bank, from
parent company to subsidiary
functional currency (p. 413)
The primary currency of a business
hedge (p. 422)
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. 427)
Direct tax levied on earnings
leading and lagging (p. 423)
Timing payments early (lead) or late (lag), depending on
anticipated currency movements, so that they have the most
favorable impact for the company
money market hedge (p. 425)
A method to hedge foreign currency exposure by borrowing
and lending in the domestic and foreign money markets
multilateral netting (p. 422)
Strategy in which subsidiaries transfer net intracompany cash
flows through a centralized clearing center
offshore financial center
(p. 418)
Location that specializes in financing nonresidents, with low
taxes and few banking regulations
subsidiary (p. 429)
Separate legal entity owned by the parent company
swap contract (p. 425)
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. 413)
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. 424)
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. 420)
Pricing that is established for transactions between members
of the enterprise
translation exposure (p. 425)
Potential change in the value of a company’s financial position
due to exposure created during the consolidation process
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
15-4
value-added tax (VAT)
(p. 427)
Indirect tax collected from the parties as they add value to the
product
withholding tax (p. 427)
Indirect tax paid by the payor, usually on passive income
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
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 LECTURE NOTES to drive
home teaching points.
LO 15-1
Outline the major accounting issues international firms face
when operating in foreign currencies.
• Accounting and Foreign Currency
o The Purpose of International Accounting
o Foreign Currency Transactions
o Foreign Currency Consolidation: Translation
and Functional Currency
o Intentional Accounting Standards on path of
the Convergence
o Accounting and Culture
Key Terms:
• consolidation
• current rate method
• temporal method
• functional currency
I. Accounting and Foreign Currency
A. The Purpose of International Accounting
1. To provide managers the data they need to make decisions and provide people
outside the organization the information they need (governments, suppliers,
investors).
2. Foreign currency issues come up in only two situations: transactions and
consolidation.
A. Foreign Currency Transactions
transaction needs to be translated into the home country currency (consolidation).
B. Foreign Currency Consolidation: Translation and Functional Currency
1. Two approaches to translation: (See Figure 15.1)
b. Temporal rate, when the translation uses an historic rate for some
translations and spot rate for others.
c. It depends on the currency in which the business is conducted (functional
currency).
C. International Accounting Standards on the Path of Convergence
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
2. The International Accounting Standards Board (IASB), whose standards are the
International Financial Reporting Standards (IFRS), used by the rest of the world.
3. Convergence towards IFRS is underway, but a slow process. GAAP based on rules
and regulations; IFRS on principles.
D. Accounting and Culture
1. Assumptions that underlie the history, legal, and political systems influence
accounting.
2. The understanding of accounting varies by culture: to control and prevent
dishonesty or to facilitate good decisions and record value? (See Figure 15.2)
LO 15-2
Outline the benefits and limitations of triple-bottom-line
accounting.
• Triple-Bottom-Line Accounting
Key Terms:
I. Triple-Bottom-Line Accounting
A. Provides a way to report its environmental, social, and economic impacts.
B. This is a key step in developing sustainable approaches.
C. 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.
• International Financial Management: Capital Structure
of the Firm
Key Terms:
• American depository
receipts (ADRs)
• offshore financial
centers
I. International Financial Management: Capital Structure of the Firm
II. Firms raise capital from two sources:
A. Internal sources, retained earnings.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
A. Firms issue stock on foreign exchanges directly or use ADRs (in U.S. market).
B. Control by foreigners is a concern, especially in sensitive industries.
IV. 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.
V. 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, including Japan and Germany, tend to rely more on debt
(Japanese keiretsu).
VI. Decisions made by a financial manager related to raising capital include.
A. In what currency should the capital be raised, considering estimates of long-term
strengths and weaknesses?
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
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.
• International Financial Management: Cash Flow
Management
o Why Funds Are Moved and Useful Techniques for
Moving Them
o International Finance Center
Key Terms:
• fronting loan
• transfer pricing
• hedge
• multilateral netting
• leading and lagging
I. International Financial Management: Cash Flow Management
A. Why Funds Are Moved and Useful Techniques for Moving Them
1. Firms move funds to make royalty payments, pay dividends, pay loans, pay for intra-
firm transfers ( via transfer pricing.
2. As they move funds, firms also can achieve cash flow management objectives.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
15-8
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Education.
a. Dealing with funds whose repatriation is blocked.
b. Achieving tax management objectives by locating profits in low-tax
environments.
c. Reducing foreign exchange risk by moving away from areas that have high
risk of devaluation.
B. Techniques for moving funds
1. Fronting loan, from parent to subsidiary, uses bank as intermediary as way to avoid
host government intra-firm transfer limitations.
2. 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.
a. May raise ethical issues.
b. Not in spirit of host country law.
C. International Finance Center
1. A centralization of finance operation as a profit center (like company bank).
2. Helpful in managing volatility of floating exchange rates.
3. Useful in accessing growing number of FX and capital markets.
7. Use of derivatives (contracts whose values are derived from the value of underlying
assets) have developed as a way to manage risks.
D. Multilateral Netting
1. Using a central clearing house for funds transfers among HQ and subsidiaries.
2. Reduces transactions costs.
3. Reduces FX costs.
4. Allows firm to benefit from investment of idle funds.
E. Leading and Lagging
LO 15-5
Identify foreign exchange risks the IC faces and ways to
address them.
• Foreign Exchange Risk Management
Key Terms:
• forward market hedge
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
o Transaction Exposure
o Translation Exposure
o Economic Exposure
• currency option
hedge
• money market hedge
• swap contract
• translation exposure
• economic exposure
V. Foreign Exchange Risk Management
A. Transaction Exposure
1. 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.
2. Leading or lagging a payment or its collection, depending on the anticipated FX
movement.
3. Exposure netting—similar to multilateral netting, a centralized clearing that matches
exposures.
4. Forward market hedge—FX contract (buy or sell) bought forward to protect against
FX movement.
5. Currency option hedge—an option to buy or sell a specific amount of currency at a
6. Money market hedge—matching exposures by borrowing and lending in the
domestic money markets.
7. Swap contract—agreement to exchange currencies at specific rates and on a
B. Translation Exposure
1. Mostly not hedged because it does not represent cash flow—hedging can increase
C. Economic Exposure
1. At operations level and results from FX rate changes on future cash flows. It is firm–
wide and long-term.
2. Hedging and swap contracts may be used.
3. Flexibility on foreign sourcing and portfolio approach to foreign market involvement
LO 15-6
Describe taxation as an international financial force.
Key Terms:
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
• value-added tax (VAT)
• withholding tax
• branch
• subsidiary
I. Taxation
A. Tax affects revenues and is an external force around which managers need to navigate.
B. There are three major types of taxes:
1. Income tax: direct tax on earnings.
2. Value-added tax: indirect tax collected from parties as they add value to the product, on
the value-added. The consumer pays tax on full value of product.
3. Withholding tax: indirect tax levied on passive income (royalties, dividends, interest
payment).
A. Tax liability of foreign operations depends on their organization.
1. Branch—extension of parent company—U.S. taxes due on earnings/losses deductible.
2. Subsidiary (separate legal entity) in most cases, active income taxable only when
remitted to parent company; passive income may be taxable as it occurs (when U.S.
parent has more than 50% ownership, called controlled foreign corporation.
B. Inversion—acquisition of foreign company in order to move legal HQ to reduce taxes.
International Business, 2e
Geringer, McNett, Ball
Instructor Guide to Module 15
ENGAGEMENT & APPLICATION
BOXED TEXT DISCUSSION QUESTIONS WITH SUGGESTED ANSWERS
IB IN PRACTICE: Banking in Africa: Mobile Money Leads the Way
This section describes mobile banking in Africa. Rather than use traditional banks that have
1. As African economies develop, do you think that cell phone providers like Safaricom will be
able to maintain their lead over traditional banks?
2. What other financial services could telecom companies offer before they should be
regulated like a bank?
Student will have a variety of opinions on this. The key point here is that receiving cash in one
location and giving it at another for a 2% fee is quite simple in the banking industry. Accepting
3. If you were a Western bank and wanted to tap into this large African market, how would
you do it?