Accounting 4570/5570

1
Accounting 4570/5570

• Chapter 1 -
• International Accounting and International
  Business

2
International Development of the Accounting
Discipline

• Pre-Italian Influence
• Italian influence
• Luca Pacioli (1494 book)
• Subsequent developments
• 1673 France Balance sheet every two years
• Industrial revolution beginning in late 1800s
• Fixed assets
• Corporate form of business
• Taxation

3
Additional Developments

• Mergers and acquisitions
• International commerce
• Technological changes
• Internal and external reporting and control
  systems
• Increased foreign trade and investment brought
  about regional economic groups

4
National Differences in Accounting Systems

• Accounting systems influenced by environments
  factors
• Economic factors
• Educational systems
• Legal systems
• Political systems
• Socio-cultural systems
• Implications - Language and currency differences

5
International Business

• All business transactions that involve two or
  more countries
• Reasons
• Expand sales due to excess capacity or small
  domestic markets
• Gain access to production factors including
• Raw materials
• Cheaper labor
• Knowledge

6
Forms of International Involvement

• Exports
• Imports
• Strategic Alliances
• Licensing agreements
• Franchising
• Management contracts
• Joint Ventures
• Foreign Direct Investment (FDI)
• Portfolio Investment

7
Foreign Direct Investment (FDI) and International
Trade

• Either purchase shares of stock or buy assets of
  companies in foreign countries
• Major host nations are the industrial nations
• Emerging markets- China
• U.S., Germany, Japan, France, U.K., China -
  largest importers and exporters
• Tennessee Trade

8
Global Enterprises

• Multinational Enterprises (MNEs)
• Have a worldwide view of production and markets
• 10 of total sales, net income or assets
• Executives often have international experience

9
Characteristics of National Economies

• Gross National Product (GNP) - value of new goods
  and services produced by domestic factors of
  production. (can be produced outside the country
  by its citizens)
• Gross Domestic Product (GDP) - value of new goods
  and services produced within a country (produced
  by its citizens and non-residents)

10
Characteristics of National Economies

• GNP (GDP) per capita - crude measure of the
  standard of living in a country ratio of that
  countrys GNP (GDP) to its population.
• Index of openness - a measure of the importance
  of international trade to an economy, calculated
  as the ratio of exports over total domestic
  production higher values indicate more open
  markets

11
Gross Domestic Product per Capita (est. 2006)

• Luxembourg 68,800
• United States 43,500
• Canada 35,200
• Switzerland 33,600
• Japan 33,100
• United Kingdom 31,400
• Germany 31,400
• Russia 12,100
• Mexico 10 600
• China 7,600
• India 3,700
• Iraq 2,900
• Afghanistan 800

12
Gross Domestic Product (GDP)(est. 2006)

• U.S. 12.98 trillion (301 million population)
• China - 10 trillion (1.3 billion population)
• Japan - 4.22 trillion (127 million population)
• India 4.042 trillion (1.1 billion population)
• Germany - 2.585 trillion (82 million population)
• U.K. - 1.903 trillion (61 million population)
• France - 1.871 trillion (64 million population)

13
Foreign Currency

• Foreign currency markets
• Spot rates
• Forward rates
• Direct/indirect rates
• How currency affects investment
• How currency affects exports/imports
• Devaluation

14
Global Players

• By market value (Exhibit 1.1)
• By total sales (Exhibit 1.1)
• By profits

15
Decision to Become Global

• Environmental Constraints
• Local
• Educational - literacy, specialized and higher
  education, attitudes toward education
• Socio-cultural - attitudes toward management,
  work and wealth, class structures
• Political and legal - relevant legal rules,
  political stability
• Economic - fiscal and monetary policy, capital
  markets, economic stability, size and type of
  industries

16
Decision to Become Global

• Environmental Constraints
• International
• Sociocultural - attitudes toward foreigners and
  nationalism
• Legal-political - trade restrictions, tariffs,
  non-tariff barriers (quotas), exchange control
  restrictions
• Economic - openness of markets,
  balance-of-payments positions, infant industries,
  unemployment, industrialization objectives

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Organizations to Reduce Trade Barriers

• World Trade Organization (WTO)
• Formerly GATT
• Regional Cooperations
• European Union (EU)
• 1993 Maastrict Agreement
• North American Free Trade Agreement (NAFTA)
  January 1, 1994
• MERCOSUR (Argentina, Brazil, Paraguay, Uruguay
  are full members while Bolivia and Chile have
  associate status)

18
Global Corporate Strategy

• Country-specific/location specific Advantages
• Raw materials, cheap labor, location, trade ties
• Firm-specific Advantages - intangibles that a
  firm possesses
• Also called acquired advantage

19
Global Corporate Strategy

• Comparative Advantage
• law that states a country will specialize in the
  goods and services that they are good at and
  trade for those goods and services for which they
  do not have an advantage in.

20
Global Corporate Strategy

• Polycentric attitude
• All operating policies and procedures must be
  adjusted to the local environment
• Ethnocentric attitude
• Everything the MNE does in the home country can
  be transferred to the foreign country, in spite
  of the environmental differences

21
Strategies

• Multidomestic - independent subsidiaries
• Global - worldwide view
• Accounting issues?
• Financial statements for foreign countries
• Consolidation issues
• Foreign currency transactions
• Management systems
• Taxation
• Audits and internal control systems

22
Environmental Influences on Business and
Management

• Accounting reflects characteristics of its
  national environment
• Environmental variables influence and help
  explain why business is conducted differently in
  different countries
• Cultural relativism the rationality of any
  behavior should be judged in terms of its own
  cultural context

23
Environmental Influences on Accounting

• Enterprise Ownership
• Broad versus family-owned
• Enterprise Activities
• Manufacturing
• Agricultural
• Services
• Technology

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Environmental Influences

• Sources of Finance
• Banks and family members versus public debt and
  equity
• Degree of capital market development
• Institutional versus individual investors
• Taxation
• Requirements that financial income must equal
  taxable income
• Accounting Profession
• How influential the profession is in the business
  world
• Formalization of accounting standards
• Standard setting in public or private sector

25
Environmental Influences

• Accounting education and research
• Highly educated gt More accounting
• Political systems
• Central planning versus private enterprise
• Social climate
• Attitudes toward work, management, employee
  involvement, wealth

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Environmental Influences

• Economic growth and development
• More growth, generally more accounting needed
• Inflation
• Must be accounted for if it is a problem
• Legal system
• Civil versus common law
• How it affects accounting regulation
• Accounting regulation
• Enforcement of standards

27
Environmental Influences

• Influence of culture
• Value systems and attitudes
• International factors
• Trade Influences
• Colonial influences
• Regional trade blocs

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Major Developmental Factors

• Corporations as legal entities - more disclosure
• Professional Management - more disclosure
• Securities Markets
• Development of markets
• Type of investees
• Emerging markets - help develop free market
  systems
• Degree of state ownership

29
Additional Financial Report Users

• Employees
• Trade unions
• Consumers
• Government agencies
• General public in foreign countries
• Greater public accountability

30
Accountability and MNEs

• Should MNEs disclose information to foreign
  countries in which they operate?
• Should MNEs leave profits in foreign countries in
  which they operate?
• Case Toyotas Global Expansion
• Case Ahold and the Challenges of Going Global