Accountancy 200 Fundamentals of Accounting

1
Accountancy 200Fundamentals of Accounting

• MULTINATIONAL ORGANIZATIONSPart I

2
International Contracting
A simple contracting example A.V. Imports, Inc.
in Columbia, MD imports wines from Italy and
Spain and sells in the United States.
3
International Contracting
A more complex contracting example Caterpillar
manufactures motor graders in its Decatur, IL
plant using a mix of domestic and foreign
(import) components and sells in both domestic
and foreign (export) markets.
4
International Contracting
A still more complex contracting
example DaimlerChrysler, a German company,
manufactures Mercedes-Benz SUVs in its Vance, AL
(foreign) plant using a mix of domestic (German)
and foreign (US) components, and sells in both
foreign (United States) and domestic (Europe)
markets.
5
Multinational Risks
What problems and risks exist for multinational
organizations that do not exist for strictly
domestic organizations?
Political and economy risks Currency exchange
risks Transaction risk Real operating
risk Taxation Financial reporting accounting
standards
6
Currency Transaction Risks
Assume you are a US medical electronics company
that imports small-signal transistors from a
Japanese manufacturer. Assume you contract for
100,000 transistors at a price of 168 per
transistor, payable, in Yen, upon delivery in 60
days. Presently, the US dollar/Japanese Yen
exchange rate is 1 105.
What would be your currency exchange gain (loss)
if the US dollar were to strengthen relative to
the Japanese Yen and the exchange rate were 1
115 on the delivery date?
7
Currency Transaction Risks
Contract price on date of inception (1US
105) Contract price on date of delivery
(1US 115)
8
Currency Transaction Risks
What is the effect, if any, of the strengthening
US on the Japanese transistor exporter?
9
Currency Transaction Risks
What would be the outcome if the US dollar were
to weaken relative to the Japanese Yen and the
exchange rate were 1 98 on the transistor
delivery date?
10
Currency Transaction Risks
Contract price on date of inception (1US
105) Contract price on date of delivery
(1US 98)
11
Currency Transaction Risks
What is the effect, if any, of the weakening US
on the Japanese transistor exporter?
12
Currency Transaction Risks
Lets follow this situation going in the opposite
direction. Lets assume that the US medical
electronics firm sells an MRI machine to Japanese
hospitals for 750,000 each. Again, assume the
US dollar/Japanese Yen exchange rate is 1 105
on the date the company sells one machine with
the sales price payable, in US, on delivery in
60 days.
What would be the currency exchange gains
(losses) if the US dollar were to strengthen
relative to the Japanese Yen and the exchange
rate were 1 115 on date of delivery?
13
Currency Transaction Risks
Contract price on date of inception (1US
105) Contract price on date of delivery
(1US 115)
14
Currency Transaction Risks
What is the effect, if any, of the strengthening
US on the US medical electronics exporter?
15
Currency Transaction Risks
How might the Japanese and US companies manage
their currency exchange risks from Existing
multinational contracts? Future multinational
contracts?