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 wellbeing and growth rest in more than one country.

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Levels of Involvement in International Trade

Emerging Role of the Multinational Corporation (MNC)
Importing
Exporting Foreign Trade Zones Wholly Owned Subsidiaries Joint Ventures

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 Example

Situation: 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 Received in dollars on 3/15 Exchange loss $100,000 98,039 $ 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. PPT 11 -13

Advantages of Decentralization in 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 PPT 11 -16

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 Performance in the MNC

An example of misleading results:
Assets Brazil Canada Spain $10 18 15 Revenues Net Income Margin Turnover $6 13 10 $3 10 6 0.50 0.77 0.60 0.60 0.72 0.67 ROI 0.30 0.55 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. PPT 11 -19

Income Taxes and Transfer Pricing

Action
Belgian subsidiary of Parent Company produces a component at a cost of $100 per unit. Title to component is transferred to a Puerto Rico division at a transfer price of $100. Reinvoices to U.S. subsidiary at a $200 transfer price

Tax Impact
42% tax rate $0 income Taxes paid = $0

0% tax rate $100 income Taxes paid = $0 35% tax rate $0 income Taxes paid = $0

U.S. subsidiary sells unit to external company for $200 each.

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Acceptable Transfer Pricing Methods

Subject to IRS Regulations:
Comparable Uncontrolled Price Method
Resale Price Method

Cost-Plus Method

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End of Week

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