Transcript Document

chapter twenty-one
Financial Management and
Accounting
McGraw-Hill/Irwin
International Business, 11/e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
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Explain capital structure choices and their impact on the
MNC
Describe the process of multilateral netting and its
contribution to cash flow management
Describe the importance of leading and lagging in cash flow
management
Categorize foreign exchange risks into transaction exposure,
translation exposure, and economic exposure
Describe the basic idea of a swap transaction and its
applications
21-3
Learning Objectives
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Explain a currency swap contract and its usefulness to the
financial manager
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Recognize the usefulness and dangers of derivatives
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Explain the role of and approaches to sales without money
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Identify the major challenges faced in international
accounting
21-4
Capital Structure of the Firm
• Retained earnings
• Debt
– Offshore financial center specializes in financing
nonresidents, low taxes and few banking
regulations
• Equity
– American depository receipts (ADRs): foreign
shares held by a custodian in the issuer’s home
market and traded in dollars on the U.S. exchange
21-5
Financial Management Decisions
• In what currency should capital be raised?
• How structured: equity, debt?
• What sources of capital?
• If capital market, which ones?
• Are other sources of money available?
• How much and for how long?
21-6
Cash Flow Management
• Multilateral Netting
– Subsidiaries transfer net intracompany cash
flows through a centralized clearing center
21-7
Cash Flow Management
• Leading and Lagging
– Timing payments early (lead) or late (lag),
depending on anticipated currency
movements, so they have the most
favorable impact
21-8
Foreign Exchange Risk Management
• Transaction exposure
– Change in the value of financial position created by
foreign currency changes between establishment
and settlement of contract
• Translation exposure
– Potential change in value of a company’s financial
position due to exposure created during
consolidation process
• Economic exposure
– Potential for value of future cash flows to be
affected by unanticipated exchange rate
movements
21-9
Transaction Exposure: Hedging
• Hedging
– process to reduce or eliminate financial risk
• Forward market hedge
– Foreign currency contract sold or bought forward in order to
protect against foreign currency movement
• Currency option hedge
– Option to buy or sell specific amount of foreign currency at
specific time to protect against foreign currency risk
• Money market hedge
– Method to hedge foreign currency exposure by borrowing and
lending in domestic and foreign money markets
21-10
Transaction Exposure: Swaps
• Swap contract
– Spot sale/purchase of asset against future
purchase/sale of equal amount in order to hedge
financial position
• Bank Swap
– Swap made between banks to acquire temporary
foreign currencies
• Currency Swap
– Exchange of debt service of loan or bond in one
currency for debt service of loan or bond in another
currency
21-11
Transaction Exposure: Swaps cont’d.
• Interest Rate Swap
– Exchange of interest rate flows to manage interest
rate exposure
• Spot and forward market swaps
– Use spot and forward markets to hedge foreign currency
exposure
• Parallel Loans
– Matched loans across currencies made to cover risk
21-12
Translation Approaches
– Current rate method
• Current assets and liabilities are valued at
current spot rates and noncurrent assets and
liabilities are translated at historic exchange
rates
– Temporal method
• Monetary accounts are valued at spot rate and
accounts carried at historical cost are translated
at historic exchange rates
21-13
Hedges and Swaps as “Derivatives”
• Contract whose value is tied to the
performance of a financial instrument or
commodity
21-14
Sales Without Money
Countertrade
– The trade of goods or services for other goods or
services (6 varieties)
• Counterpurchase
– Goods supplied do not rely on the goods imported
• Compensation
– Developing country makes payment in products
produced by use of developed country equipment
• Barter
– Direct exchange of goods or services for goods or
services
21-15
Sales Without Money, cont’d.
• Switch Trading
– Use of third party to market products
received in countertrade
• Offset
– Trade arrangement that requires portion of
the inputs be supplied by receiving country
• Clearing account arrangements
– Process to settle trading account within
specified time
21-16
Industrial Cooperation
• An exporter’s commitment to a longerterm relationship than that in a simple
export sale, in which some of the
production occurs in the receiving
country (five methods)
– Joint Venture
– Coproduction and specialization
– Subcontracting
– Licensing
– Turnkey plants
21-17
Taxation and Transfer Pricing
• Income tax
– Direct tax levied on earnings
• Value-added tax (VAT)
– Indirect tax collected from parties as they
add value to product
• Withholding tax
– Indirect tax paid by payor, usually on
passive income
21-18
Taxation and Transfer Pricing
• Transfer Price
– The cost of intracompany sale of goods or
services
21-19
International Accounting
• Accounting and Foreign Currency
– Consolidation
• Process of translating subsidiary results
and aggregating them into one financial
report
– Functional Currency
• Primary currency of a business
21-20
Cultural Differences in Measurement and
Disclosure for Accounting Systems
21-21
Convergence of Accounting
Standards
• Financial Accounting Standards Board
(FASB)
– U.S. Generally Accepted Accounting
Principles (U.S.GAAP)
• International Accounting Standards
Board (IASB)
– International Financial Reporting Standards
(IFRS)
21-22
Use of International Financial
Reporting Standards
21-23
Triple Bottom-Line Accounting
• 3BL
– A results or impact report on the
environmental, social, and financial impacts
of the business
21-24