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International Accounting

& Multinational
Enterprises
Lee H. Radebaugh
Sidney J. Gray
Ervin L. Black
6th edition
John Wiley & Sons, Inc.

Chapter 1
International Accounting
and
International Business

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

The International Development of


the Accounting Discipline

Double-entry accounting

Luca Pacioli Summa de Arithmetica

Developed in Italy between the 13th and 15th Centuries


Spread to other European countries
Memorandum book, journal, and ledger

Adapted due to changes in

Business form
Taxation
Globalization

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

National Differences in
Accounting Standards

Many different systems throughout the world

Accounting systems

Reconciliation is still a challenge


Evolve
Reflect the environments they serve

Development of accounting influenced by

Educational systems
Legal systems
Political systems
Sociocultural characteristics

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

The Evolution and Significance of


International Business
Began

with the Greeks around the fifth


century B.C.
Trade became a privilege granted by the
state
16th and 17th centuries saw the first major
foreign investments (colonies)
Center of commercial and business activity
shifted westward
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

The Evolution and Significance of


International Business

Industrial Revolution

Multinational firms developed Ford, Singer


Foreign investments become more influential

Post-World War II Period

International business stunted


Great Depression
World War II
Renewal in foreign trade and investment
Formation of European Economic Community (now the
European Union)
Greater stability

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Reasons for International


Involvement
Expand

Excess capacity
Greater profit potential

Gain

sales

access to

Raw materials
Other factors of production (cheap labor)
Knowledge
New developments in technology

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Forms of International
Involvement
Exports

and imports of goods and services


Strategic alliances

Licensing agreement (intangible property)


Franchise agreement (Holiday Inn, McDonalds)

Investment

abroad

Direct investment
Joint venture

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Multinational Enterprises
Possess

Production
Sourcing of raw materials and components
Final markets

Elite

a worldwide view of

MNE

10% of a companys overall assets, earnings, and


employees are abroad

Significant

geographical spread
International experience of executives
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Multinational Enterprises
Firm Size and
Saturation of
Domestic Market

Probability of
International
Transactions

Small companies

Export and import


Manufacture products abroad or outsource
production
Licensing agreements.

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Large Multinational
Enterprises
Top 10 Companies by Market Value in 2004
Source: Business Week Global 1000
Rank

Name

Country

Market Value
($ Billions)

2004

2003

General Electric

U.S.

328.11

Microsoft

U.S.

284.43

Exxon Mobil

U.S.

283.61

Pfizer

U.S.

269.66

Wal-Mart Stores

U.S.

241.19

Citigroup

U.S.

239.43

BP

Britain

193.05

10

American International Group

U.S.

191.18

13

Intel

U.S.

184.66

10
8
Royal Dutch Petroleum
Netherlands
174.83
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Large Multinational
Top 10 Companies by Sales in 2003
Enterprises
Source: Fortune Global 500

Rank

Name

Country

Sales
($ Billions)

2003

2002

Wal-Mart Stores

U.S.

263.00

BP

Britain

232.57

Exxon Mobil

U.S.

222.88

Royal/Dutch Shell Group

Britain/Neth.

201.73

General Motors

U.S.

195.32

Ford Motor

U.S.

164.51

DaimlerChrysler

Germany

156.60

Toyota Motor

Japan

153.11

General Electric

U.S.

134.18

10
14
Total
France
118.44
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Deciding to Become Global


Assessment

of

External environment
Internal capabilities of the firm

Environmental

constraints

Educational, sociological, political and legal, and


economic
Country-specific advantages (cheap materials,
labor)

Firm-specific

advantages intangible assets

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Environmental Influences on
Accounting

Enterprise ownership
Broad ownership
State ownership
Family ownership
Business activities influence the nature of the accounting system
Sources of finance and pressure for accountability
External shareholders
Banks
Family sources
Taxation
Accounting systems influenced by state objectives (France)
Accounting systems separate from state objectives (U.S.)

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Environmental Influences on
Accounting
Developed

accounting profession

Judgmentally based accounting systems


Depends upon accounting education and
research

Political

system accounting system reflects


political philosophy
Social climate level of employee awareness

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Environmental Influences on
Accounting

Economic growth and development


Inflation leads to
alternative approaches
Legal system and regulation of accounting

Civil codes (France and Germany)


Common law (U.S. and U.K.)

Culture (societal or national values)


International factors

Colonial influence
Regional trade blocs (European Union)

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Accounting Standards and


Traditions

International Accounting Standards Board

Former socialist economies are adjusting

Works for convergence


Russia and Eastern Europe

British and continental European traditions are now


being coordinated

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Major Development Factors

Corporations recognized as legal entities with limited


liability

Professional management

Protects shareholders and creditors


A point of controversy

Emergence of securities markets

Fundamental element of the transition to a market


economy
Shows need to attract foreign investment
Broadened disclosure

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Major Development Factors

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Corporate Disclosure

Disclosure to finance providers can be seen as a


spectrum

Accounting disclosure

Least disclosure shareholders and investors


Varied disclosure depends on the purpose of the
disclosure and the power of the finance provider
Used as a means of national economic planning and
control (Examples France and Sweden)

Accounting professionals

Played a key role in developing accounting systems


(Examples U.S. and U.K.)

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Trends in Securities Markets


Strong

move to attract foreign companies to


list on exchanges

2004 trading volume of non-U.S. firms listed on


NYSE was 10.5% of the Exchanges total trading
volume

Consolidation

of exchanges
Exchanges in developing countries are
growing

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

A Wider Audience
Increased

disclosure to other groups

Employees, trade unions, consumers,


government agencies, and the general public

Expectations

of nonfinance providers

Not clearly defined


Techniques to measure them do not exist

Less

developed countries have less


accountability and disclosure

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Accountability and
Multinational Enterprises
Demand

for greater disclosure by the host


country can be a bargaining tool
MNE view

Just a part of global operations


Some MNEs have acted in ways detrimental to a
host country.

Host

countrys view

Business activities of an MNE are of primary


concern

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Accountability and
Multinational Enterprises
Domestic

Corporations

Primary operations in one country


Cross-frontier relationships with unrelated parties

Multinational

Enterprises

Operate in many countries with different laws and


currencies
Significant volume of transactions between units
located in different countries

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

Accounting Aspects of
International Business
Exposure

Importing or exporting
Costs of outside expertise

to International Accounting

Increase with increased trade


Should develop in-house experts
Separate organization to handle international trade

Establishment of a foreign unit


Awareness of international market conditions

Lower cost of capital

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr

The Field of International


Accounting

Descriptive/comparative accounting
Important issues

Forces and conditions that create international differences

Trend toward convergence

International transactions/multinational enterprises


Important issues

Financial reporting problems


Translation of foreign currency financial statements,
Information systems
Budgets and performance evaluation
Audits
Taxes

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gr