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Chapter Nineteen

Accounting in theInternational Business

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Case: Adoption of International

Accounting Standards in Germany

In Germany, market for debt is expensive; limitedpossibility for raising additional equity

German firms begin to raise equity on international capitalmarkets only in 1990

Major German firms apply for listing on the US Securitiesand Exchange commission (SEC)

SEC was not responsive because German accounting

standards were not comparable to those in the US. Notenough information to investors

Adhering to generally accepted accounting principles(GAAP) has its positives and negatives

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Accounting Information and

Capital Flows

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Determinants of National

Accounting Standards

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Relationship Between

Business and Providers of Capital

Three external sources of capital:- Individual investors

Buying shares and bonds

- Banks

Loan capital

- Government

Make loans or investment

Importance of each

varies from country

to country

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Political and Economic

Ties With Other Countries

Accounting convergence:

- Influence of NAFTA

- Influence of the former British Empire- Influence of the European Union

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Inflation Accounting

Historic cost principle:- Assumes currency is not losing value to inflation

- Most significant impact in the area of asset valuation

- Appropriateness varies with inflation

Current cost accounting:- Factors out inflation

- Used in Great Britain until inflation rate declined

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Culture

Hofstedes uncertainty avoidance has an impact on

accounting systems

- Low uncertainty avoidance - these countries tend to havestrong independent auditing professions that ensure a

firms compliance with rules

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National and

International Standards

Diverse accounting practices are enshrined in national

accounting and auditing standards

Accounting standards: Rules for preparing financialstatements

Auditing standards: Specify rules for performing an

audit

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Lack of Comparability

One result of national differences in auditing andaccounting standards is lack of comparability offinancial reports

With growth of global capital markets bothtransnational financing and transnational investmenthave grown

Firm has to explain to investors why its financialposition looks different in two accountings

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International Standards

Efforts to harmonize accounting standards acrosscountries Formation of International Accounting Standards

Board Members represent 79 countries Responsible for formulating international accounting

standards (IAS)

Has issued over 30 IAS- Difficult to get requisite votes- Voluntary compliance

Recognition is growing

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Multinational Consolidation and

Currency Translation

Subsidiaries of multinationals are separate legal entities but notseparate economic entities

Transactions among members of a corporate family not

included in consolidated financial statements.O

nly assets,liabilities, revenues, and expenses statements with externaltrade parties are shown

Purpose is to provide accounting info about a group ofcompanies that recognizes economic interdependence(subsidiaries)

Financial statements of subsidiaries are prepared in the localcurrency

For the consolidated accounts of a multinational, these accountsthen have to be converted into currency of multinationals homecountry

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Current US Practice

Statement 52 Foreign Currency Translation

Self-sustaining autonomous subsidiary:- Functional currency is local currency

- Balance sheet uses exchange rate atend of financial year- Income statement is financial year average

Integral subsidiary:- Functional currency is US currency- Financial statements use the

temporal method- Dangling credit or debit increases or- Decreases consolidated earningsfor the period

Firms using

multidomestic or

internationalstrategies.

Firms using

global or

transnational

strategies.

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Accounting Aspects of

Control Systems

Annual control process involves three steps:- Head office and sub-unit management jointly determine

sub-unit goals for the coming year- Throughout year, head office monitors sub-unit

performance against agreed goals

- If sub-unit fails to achieve goals, head office intervenes to

determine why the shortfall occurred, taking corrective

action when appropriate

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Exchange Rate Combinations in the

Control Process

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Accounting Aspects of

Control Systems

Lessard- LorangeModel:- Three exchange rates used to translate foreign

currency into corporate currency for budget and

performance purposes The initial rate, the spot exchange rate when the budget

is adopted

The projected rate, the spot exchange forecast for theend of budget period (i.e., the forward rate)

The ending rate, the spot exchange rate when thebudget and performance are being compared

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Transfer Pricing and

Control Systems

Transfer prices introduce significant distortions into

the control process

Transfer price must be taken into account when settingbudgets and evaluating a subsidiarys performance

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Looking Ahead to Chapter 20

FinancialManagement in the International Business- Investment Decisions

- Financing Decisions- Global Money Management: The efficiency Objective

- Global Money Management: The Tax Objective

- Moving Money Across Borders: Attaining Efficiencies and

Reducing Taxes

- Techniques for Global Money Management