Transcript Power Point Slides 9e\Chap020.ppt

International Business
9e
By Charles W.L. Hill
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 20
Accounting and Finance
in the International
Business
What Is Accounting?
 Accounting is the language of business
 it is the way firms communicate their financial
positions
 Accounting is more complex for international
firms because of differences in accounting
standards from country to country
 differences make it difficult for investors, creditors,
and governments to evaluate firms
 It is difficult to compare financial reports from
country to country because of national
differences in accounting and auditing standards
20-3
What Determines National
Accounting Standards?
 Accounting standards are rules for preparing
financial statements
 variables influencing accounting systems include
 the relationship between business and the
providers of capital
 political and economic ties
 the level of inflation
 the level of economic development
 the prevailing culture in a country
 Auditing standards specify the rules for
performing an audit
20-4
Why Are International
Accounting Standards Important?
 The growth of transnational financing and
transnational investment has created a need for
transnational financial reporting
 many companies obtain capital from foreign providers
who are demanding greater consistency
 Standardization of accounting practices across
national borders is probably in the best interests
of the world economy
 The International Accounting Standards Board
(IASB) is a major proponent of standardization of
accounting standards
20-5
How Does Accounting
Influence 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
 Budgets and performance data are usually
expressed in the corporate currency
20-6
How Do Exchange Rates
Influence Control?
 The Lessard-Lorange Model  firms can deal with the problems of exchange
rates and control in three ways
1. The initial rate
 the spot exchange rate when the budget is adopted
2. The projected rate
 the spot exchange rate forecast for the end of the
budget picture
3. The ending rate
 the spot exchange rate when the budget and
performance are being compared
20-7
What Is The
Lessard-Lorange Model?
Possible Combinations of Exchange Rates in the Control Process
20-8
What Is
Financial Management?
 Financial management involves
1. Investment decisions –what to finance
2. Financing decisions –how to finance those decisions
3. Money management decisions –how to manage the
firm’s financial resources most efficiently
 Decisions are more complex in international
business because of different currencies, tax
regimes, regulations on capital flows, economic
and political risk, etc.
20-9
How Do Managers Make
Investment Decisions?
 Financial managers must quantify the benefits,
costs, and risks associated with an investment in
a foreign country
 To do this, managers use capital budgeting
 involves estimating the cash flows associated with the
project over time, and then discounting them to
determine their net present value
 If the net present value of the discounted cash
flows is greater than zero, the firm should go
ahead with the project
20-10
Why Is Capital Budgeting More
Difficult For International Firms?
Capital budgeting is more complicated in
international business
because a distinction must be made between
cash flows to the project and cash flows to the
parent company
because of political and economic risk
because the connection between cash flows
to the parent and the source of financing must
be recognized
20-11
How Does Risk Influence
Investment Decisions?
 Political risk - 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
 higher in countries with social unrest or disorder, or
where the nature of the society increases the chance
for social unrest
 Economic risk - 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
20-12
How Can Firms Adjust For
Political And Economic Risk?
 Firms analyzing foreign investment
opportunities can adjust for risk
1. By raising the discount rate in countries
where political and economic risk is high
2. By lowering future cash flow estimates to
account for adverse political or economic
changes that could occur in the future
20-13
How Do Firms Make
Financing Decisions?
 Firms must consider two factors
1. How the foreign investment will be
financed
2. How the financial structure (debt vs.
equity) of the foreign affiliate should be
configured
 Most experts suggest that firms adopt
the structure that minimizes the cost of
capital, whatever that may be
20-14
What Is Global
Money Management?
 Money management decisions attempt to
manage global cash resources efficiently
 Firms need to
1. Minimize cash balances - need cash
balances on hand for notes payable and
unexpected demands
2. Reduce transaction costs - the cost of
exchange
 multinational netting
20-15
How Can Firms Limit
Their Tax Liability?
 Every country has its own tax policies
 most countries feel they have the right to tax
the foreign-earned income of companies
based in the country
 Double taxation occurs when the income
of a foreign subsidiary is taxed by the
host-country government and by the
home-country government
20-16
How Can Firms Limit
Their Tax Liability?
 Taxes can be minimized through
1. Tax credits - allow the firm to reduce the taxes paid to
the home government by the amount of taxes paid to
the foreign government
2. Tax treaties - agreement specifying what items of
income will be taxed by the authorities of the country
where the income is earned
3. Deferral principle - specifies that parent companies
are not taxed on foreign source income until they
actually receive a dividend
4. Tax havens - countries with a very low, or no, income
tax – firms can avoid income taxes by establishing a
wholly-owned, non-operating subsidiary in the
country
20-17
How Do Firms Move
Money Across Borders?
 Firms can transfer liquid funds across border
via
1. Dividend remittances - the most common
method of transferring funds from
subsidiaries to the parent
2. Royalty payments and fees -the
remuneration paid to the owners of
technology, patents, or trade names for the
use of that technology or the right to
manufacture and/or sell products under
those patents or trade names
20-18
How Do Firms Move
Money Across Borders?
3. Transfer prices -the price at which goods
and services are transferred between
entities within the firm
4. Fronting loans -loans between a parent and
its subsidiary channeled through a financial
intermediary, usually a large international
bank
20-19