Accounting 4570/5570

Chapter 1 -

International Accounting and International Business

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

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

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

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

Forms of International Involvement

• Exports

• Imports

• Strategic Alliances – Licensing agreements– Franchising– Management contracts– Joint Ventures

• Foreign Direct Investment (FDI)

• Portfolio Investment

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

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

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)

Characteristics of National Economies

• GNP (GDP) per capita - crude measure of the standard of living in a country; ratio of that country’s 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

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

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)

Foreign Currency

• Foreign currency markets– Spot rates– Forward rates– Direct/indirect rates

• How currency affects investment

• How currency affects exports/imports

• Devaluation

Global Players

• By market value (Exhibit 1.1)

• By total sales (Exhibit 1.1)

• By profits

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

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

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)

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

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.

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

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

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

Environmental Influences on Accounting

• Enterprise Ownership– Broad versus family-owned

• Enterprise Activities– Manufacturing

– Agricultural

– Services

– Technology

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

Environmental Influences

• Accounting education and research– Highly educated > More accounting

• Political systems– Central planning versus private enterprise

• Social climate– Attitudes toward work, management, employee

involvement, wealth

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

Environmental Influences

• Influence of culture – – Value systems and attitudes

• International factors– Trade Influences

– Colonial influences

– Regional trade blocs

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

Additional Financial Report Users

• Employees

• Trade unions

• Consumers

• Government agencies

• General public in foreign countries

• Greater public accountability

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: Toyota’s Global Expansion• Case: Ahold and the Challenges of Going

Global