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ADVANCED MANAGEMENT ACCOUNTING

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International Issues in Advanced

Management Accounting

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Learning Objectives

Explain the role of the accountant in the international environment.

Discuss the varying levels of involvement that firms can take in international trade.

Explain the ways accountants can manage foreign currency risk.

Explain why multinational firms choose to decentralize.

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Learning Objectives (continued)

Explain how environmental factors can affect performance evaluation in the multinational firm.

Discuss the role of transfer pricing in the multinational firm.

Discuss ethical issues that affect firms operating in the international environment.

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Management Accounting in the International Environment

Politics Economics Marketing Management Information Technology

Knowledge needed by

Management Accountant

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Multinational Corporation (MNC)

A multinational corporation (MNC) is one that “does business in more than one country in such a volume that its well-being and growth rest in more than one country.”

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Levels of Involvement inInternational Trade

Importing

Exporting

Foreign Trade Zones

Wholly Owned Subsidiaries

Joint Ventures

Emerging Role of the Multinational Corporation (MNC)

Trade treaties on tariffs are becoming increasingly important.

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Importing and Exporting

Importing is the process of bringing product in from a foreign country.

Exporting is the process of shipping product to a foreign country.

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Foreign Trade Zones

Foreign trade zones are areas near a customs port of entry that are physically on U.S. soil but considered to be outside U.S. commerce.

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Foreign Currency Exchange

Kinds of Risks

Currency risk management

Transaction risk

Economic risk

Translation (accounting ) risk

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A Transaction Risk ExampleSituation:

Assume a U.S. firm sells products to a French distributor.

On January 1 the French distributor orders 100 units of the product for

$1,000 per unit to be delivered immediately and paid in French francs

on March 15. The exchange rate at the time of sale was 5 francs per

dollar. On March 15, the exchange rate was 5.1 francs per dollar.

Impact of transaction risk:

Receivable in dollars 1/15

$100,000

Received in dollars on 3/15

98,039

Exchange loss

$ 1,961

=======

The purchase of a forward contract can act as a hedge against transaction risk.

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An Economic Risk Example

Situation:

Suppose that U.S. consumers can purchase heavy equipment from Japanese and U.S. manufacturers for $50,000. If the purchase is made from Japanese

manufactures at an exchange rate of 105 yen per dollar, the purchase price is set at 5,250,000 yen. If the value of the dollar weakens against the yen to

100 yen to the dollar, the cost of the same Japanese equipment becomes $52,250 for the U.S. customer. The Japanese Company is less competitive without

a change in its cost structure.

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A Translation Risk Example

Situation:

Suppose you are a division manager in Mexico. Your division earned 320,000 pesos. This up from 200,000 pesos the year before, a hefty 60 percent

increase. Now suppose the income is translated into dollars. If the exchange rate last year was 1.5 pesos

per dollar and the exchange rate this year is 3 pesos per dollar, your net income translates into $133,333 net income last year and $106,667 this

year. This translation results in a 20 percent decrease in net income.

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Advantages of Decentralizationin the MNC

The quality of information is better at the local level.

Local managers in the MNC are capable of a more timely response in decision making.

Social, legal, and language barriers are minimized.

Valuable training grounds for foreign subsidiary managers.

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Environmental Factors Affecting Performance Evaluation in the MNC

Economic Factors:

Organization of central banking system

Economic stability

Existence of capital markets

Currency restrictions

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Environmental Factors Affecting Performance Evaluation in the MNC

Political and Legal Factors:

Quality, efficiency, and effectiveness of legal structure

Effect of defense policy

Impact of foreign policy

Level of political unrest

Degree of governmental control of business

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Environmental Factors Affecting Performance Evaluation in the MNC

Educational Factors:

Literacy rate

Extent and degree of formal education and training systems

Extent and degree of technical training

Extent and quality of management development programs

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Environmental Factors Affecting Performance Evaluation in the MNC

Sociological Factors:

Social attitude toward industry and business

Cultural attitude toward authority and persons in subordinate positions

Cultural attitude toward productivity and achievement (work ethic)

Social attitude toward material gain

Cultural and racial diversity

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Measuring Performancein the MNC

An example of misleading results:

Assets Revenues Net Income Margin Turnover ROI

Brazil $10 $ 6 $ 3 0.50 0.60 0.30

Canada 18 13 10 0.77 0.72 0.55

Spain 15 10 6 0.60 0.67 0.40

Analysis:

On the basis of ROI, it appears that the manager of the Canadian subsidiary did the best job, while the manager of the Brazilian subsidiary did the worst job. However, the inflation rate in Brazil was 100% for the year. After adjusting the asset base for inflation, the ROI would be 60% for the Brazilian manager.

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Action Tax Impact

Belgian subsidiary of Parent Company 42% tax rate

produces a component at a cost of $100 $0 income

per unit. Title to component is transferred Taxes paid = $0

to a Puerto Rico division at a transfer

price of $100.

Reinvoices to U.S. subsidiary at a $200 0% tax rate

transfer price $100 income

Taxes paid = $0

U.S. subsidiary sells unit to external 35% tax rate

company for $200 each. $0 income

Taxes paid = $0

Income Taxes and Transfer Pricing

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Subject to IRS Regulations:

Comparable Uncontrolled Price Method

Resale Price Method

Cost-Plus Method

Acceptable Transfer Pricing Methods

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End of Week