International

Business
9e
By Charles W.L. Hill
McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 20
Accounting and Finance
in the International
Business

What Is Accounting?
Accounting is the language of business
it is the way firms communicate their financial
positions

Accounting is more complex for international

firms because of differences in accounting
standards from country to country
differences make it difficult for investors, creditors,
and governments to evaluate firms

It is difficult to compare financial reports from

country to country because of national
differences in accounting and auditing standards
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What Determines
National 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
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Why Are International

Accounting Standards
Important?
The growth of transnational financing and

transnational investment has created a need for

transnational financial reporting
many companies obtain capital from foreign providers
who are demanding greater consistency

Standardization of accounting practices across

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
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How Does Accounting

Influence Control
Systems?
The control process
in most firms is usually

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

Budgets and performance data are usually

expressed in the corporate currency
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How Do Exchange Rates

Influence Control?
The Lessard-Lorange Model firms can deal with the problems of exchange
rates and control in three ways
1. The initial rate
the spot exchange rate when the budget is adopted
2. The projected rate
the spot exchange rate forecast for the end of the
budget picture
3. The ending rate
the spot exchange rate when the budget and
performance are being compared
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What Is The
Lessard-Lorange Model?
Possible Combinations of Exchange Rates in the Control Process

20-8

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
firms financial resources most efficiently

Decisions are more complex in international

business because of different currencies, tax
regimes, regulations on capital flows, economic
and political risk, etc.

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How Do Managers Make

Investment Decisions?
Financial managers must quantify the benefits,
costs, and risks associated with an investment in
a foreign country
To do this, managers use capital budgeting
involves estimating the cash flows associated with the
project over time, and then discounting them to
determine their net present value

If the net present value of the discounted cash

flows is greater than zero, the firm should go
ahead with the project
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Why Is Capital Budgeting

More Difficult For
International
Firms?

Capital budgeting is more complicated in

international business
because a distinction must be made between
cash flows to the project and cash flows to the
parent company
because of political and economic risk
because the connection between cash flows
to the parent and the source of financing must
be recognized
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How Does Risk Influence

Investment Decisions?
Political risk - the likelihood that political forces
will cause drastic changes in a countrys
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
countrys business environment that hurt the
profit and other goals of a business
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How Can Firms Adjust For

Political And Economic
Risk?
Firms analyzing foreign investment
opportunities can adjust for risk
1. By raising the discount rate in countries
where political and economic risk is high
2. By lowering future cash flow estimates to
account for adverse political or economic
changes that could occur in the future

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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
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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
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How Can Firms Limit

Their Tax Liability?
Every country has its own tax policies
most countries feel they have the right to tax
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

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How Can Firms Limit

Their Tax Liability?
Taxes can be minimized through
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

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How Do Firms Move

Money Across Borders?
Firms can transfer liquid funds across border
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

20-18

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

20-19