Lecture International business (9e): Chapter 20 - Charles W.L. Hill

Chapter 20 - Accounting and finance in the international business. The main goals of this chapter are to: 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,...

9e 

By Charles W.L Hill

Accounting and Finance

in the International

Business

 it is the way firms communicate their financial

positions

firms because of differences in accounting

standards from country to country

 differences make it difficult for investors, creditors,

and governments to evaluate firms

country to country because of national

differences in accounting and auditing standards

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

Why Are International  Accounting Standards Important?

transnational investment has created a need for transnational financial reporting

 many companies obtain capital from foreign providers who are demanding greater consistency

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

Control Systems?

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

expressed in the corporate currency

Influence Control?

rates and control in three ways

1 The initial rate

 the spot exchange rate when the budget is adopted

1 The projected rate

 the spot exchange rate forecast for the end of the

budget picture

1 The ending rate

 the spot exchange rate when the budget and

performance are being compared

What Is The  Lessard­Lorange Model?

Possible Combinations of Exchange Rates in the Control Process

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

business because of different currencies, tax

regimes, regulations on capital flows, economic and political risk, etc

How Do Managers Make  Investment Decisions?

costs, and risks associated with an investment in

a foreign country

 involves estimating the cash flows associated with the project over time, and then discounting them to

determine their net present value

flows is greater than zero, the firm should go

ahead with the project

Difficult For International Firms?

 Capital budgeting is more complicated in

international business

cash flows to the project and cash flows to the parent company

to the parent and the source of financing must

be recognized

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

Political And Economic Risk?

 Firms analyzing foreign investment

opportunities can adjust for risk

where political and economic risk is high

account for adverse political or economic changes that could occur in the future

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

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

How Can Firms Limit  Their Tax Liability?

 Every country has its own tax policies

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

How Can Firms Limit  Their Tax Liability?

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

How Do Firms Move  Money Across Borders?

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

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