International Accounting and International Business

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International Accounting and International
Business
Chapter One
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• The basic purpose of accounting is to provide
  useful information to prudent userscreditors,
  investors, and those how advise them.
• Useful information is reliable and relevant. It
  should be neutral, verifiable, representationally
  faithful, and have predictive value, feedback
  value, and be timely.

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• This becomes difficult when dealing with a
  multinational enterprisea corporation with
  foreign operations, foreign transactions, and/or
  users of the financial information that are in a
  different domicile than the reporting entity.

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• How many accounting systems do companies use in
  the US?

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• External reporting
• Tax reporting
• Internal decision-making, including JIT, CPV,
  make/buy decisions, NPV of investments,
  performance evaluations

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• So how many accounting systems do you think there
  are internationally?

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Who Uses Accounting Information?

• Government
• Creditors
• Management
• Owners (private and public)
• Neighbors
• Employees
• Social and environmental activists
• Unions
• Others

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Why is understanding International Accounting
important?

• Increasingly internationalized world of business
• Language and currency are different (even
  terminology!)
• Types and amount of information disclosed are
  likely to be different

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• Procedures followed to determine figures are
  likely to be different and may not be
  explainedvaluation(i.e., historical cost, fair
  market value, discounted cash flows) recognition
  and timing of recognition, and even realization

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Why would we expect these differences?

• Differences in culture, business practices,
  political and regulatory structures, legal
  systems, currency value, foreign exchange rates,
  local inflation rates, business risk, sources of
  finance, and tax codes all affect how the MNE
  conducts its operations and how it reports the
  results of those operationsthat is, the
  companys financial reporting..around the world.

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To think about as we begin this course

• Why are international accounting issues
  important?
• Who has access to what information? Is the
  access to governments, creditors, stockholders,
  neighbors, unions, different?
• Who has the ability to request and receive
  information that might not otherwise be readily
  available?

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• What difference does form of business make when
  considering information users and information
  needs? Corporation, sole proprietorship,
  partnership
• How are financing needs, financing sources, and
  business form related? Where do businesses get
  capital? Family, friends, banks, investors
• What does this have to do with accounting
  information?

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World Capital Markets

• North America
• New York, San Francisco, Chicago, Toronto
• Asia
• Hong Kong, Tokyo
• Australia
• Sydney
• Europe
• London, Zurich, Frankfurt, Brussels, Milan,
  Paris, Amsterdam, Stockholm, Madrid
• South America
• Buenos Aires, Santiago, Mexico City
• Africa
• Johannesburg

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As we become a global economy

• World capital markets compete for listings
• Companies increasingly use multiple sources of
  capital
• Diversify risk
• Greater access to funds

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How did we get to where we are today?
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Historical Development of Accounting

• Ancient World
• Mesopotamia, Egypt, India, China, Rome
• Middle Ages Rise of Double Entry Bookkeeping,
  which seems to have evolved independently in
  different places, responding to the changing
  nature of business transactions and the need to
  record them properly
• Genoa, Florence, Venice

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National Differences in Accounting Systems

• Historical developments did not lead to
  uniformity in international accounting practice
• Despite similarities, no two systems are exactly
  alike
• Reasons for Differences
• Economic,
• Educational,
• Legal,
• Political, and
• Social/ Cultural Factors

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Implications of National Differences in
Accounting

• Acts as a barrier to the free-flow of
  international business information
• Potential to inhibit efficient allocation of
  resources
• Potential to increase the cost of capital

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Evolution and Significance of International
Business

• Greek Period
• First international sales of mass-produced
  products through Greece in 5 B.C.
• Roman Period
• First open market with political stability,
  better transportation, and few tariffs or
  restrictions
• Middle Ages
• Banking, Insurance, and trade fairs in Byzantium

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The Preindustrial Period

• Europe Rise of Mercantilism
• Right to trade regulated by the state,
• Colonialism driven by states direct investment
  in colonies and near-monopolistic control of
  trade, and
• Dominated by Western European Nations.

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The Industrialization Period 1780-1945

• Technological inventions led to unprecedented
  mass production and standardization,
• Implementation of large-scale infrastructure
  between historically separate markets, and
• Birth of large multinational corporations such
  as Singer, Ford, Dunlop, and Lever Brothers.
• The mass production of goods encouraged (or
  perhaps required) companies to look for new
  markets to take advantage of these economies of
  scale.

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The Post-World War II Period

• Great Depression and WWII stunted international
  trade
• Following the end of the war, demand for products
  and services, trade and investment sharply
  increased.

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The Multinational Era

• Involvement in International trade is essential
  for developing nations, and
• For the continued economic growth of developed
  nations.

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What is International Business?

• All business transactions involving two or more
  countries.

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Reasons for International Involvement

• Expand sales,
• Gain access to raw materials and other factors of
  production, and
• Obtain information, technical expertise (i.e.
  patents, licenses, know-how).

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Forms of International Involvement

• Exporting and Importing of goods and services,
• Strategic alliances including licensing
  agreements, franchises, and joint ventures,
  (McDonalds, Holiday Inn, Pizza Hut), and
• Direct investment.

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Global Enterprises

• Multinational enterprises are those which
• Have a world-wide view of production, materials,
  components and final markets
• Have over 10 of sales, assets, earnings, and
  employees abroad.

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Large MNEs

• Indicators
• Sales and Market Value,
• Profits and Return on Shareholders Equity, and
• Worldwide stock market valuations.

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The Decision to Become Global

• The decision to become global depends on how
  effectively management assesses two different but
  interactive dimensions the external environment
  and the internal capabilities of the firm.

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The Decision to Become Global External
Environment v. Internal Capabilities

• Environmental Constraints-Domestic
• Educational,
• Sociological (Sociocultural),
• Political/ Legal, and
• Economic.

• Environmental Constraints-International
• May differ from domestic constraints and mostly
  concerned with nationalism

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Firm Specific Advantages

• Intangibles that provide a unique firm advantage,
• Examples include market-niche capabilities and
  personnel advantages.

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Accounting Aspects of International Business

• Accounting requirements differ with each
  successive stage of international involvement,
• For example, import-export stage would require
  investigation of potential buyer or seller for
  purposes of determining credit-worthiness and
  capacity to perform.
• Initial Issues may include statements written in
  foreign language, amounts in foreign currencies,
  and information produced using different
  standards.

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Establishing an Internal International
Accounting Capability

• Increased international involvement requires
• Internal accounting resources,
• Creation of separate organization to handle
  international trade, and
• Creation of a foreign operation of some kind.
• Degrees of Involvement
• International accounting knowledge may be
  necessary even with no direct international
  business involvement (i.e. company needs to
  borrow money or sell stock internationally).

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The Field of International Accounting

• Increased need for accountants who understand the
  international accounting environment,
• International certification possibilities, and
• Fascinating career opportunities.

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Capital Markets

• Accounting plays a critical role in the efficient
  functioning of capital markets (and Enron has
  given us a taste of just how important it is to
  have reliable accounting information if capital
  markets are going to function efficiently)

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• The needs of capital market participants have
  strongly shaped the development of accounting
  practice.

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• The dollar value of cross-border equity listings
  almost tripled between 1995 and 1999, with over
  US500 billion raised during that 5-year period.
  International offerings in bonds, syndicated
  loans, and other debt instruments also grew
  dramatically during the 1990s.

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• From 1998 through 2001, for example, 405 non-U.S.
  firms listed on Nasdaq, raising an average of
  125.5 million each.

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• One of the biggest constraints to growth is
  access to capital.

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• In previous decades, companies typically listed
  on their home country's stock exchange Firms in
  places such as the United States and Germany had
  an advantage because those two countries had the
  richest capital markets. A company with a good
  product or service and a potentially hefty pool
  of customers was likely to get funded.
• In contrast, firms in entrepreneurially energetic
  places with smaller stock markets such as Israel
  and India operated at a disadvantage. Simply put,
  there was less money to go around.

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• In a survey, Amit and Zott discovered multiple
  reasons for cross-border listings, although
  fundraising predominated. Every firm they
  surveyed listed money as a motive. But about
  two-thirds also wanted to increase their
  international visibility, and a third wanted to
  broaden the geographic distribution of their
  shareholders.

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• Companies that list abroad also make useful
  foreign contacts and improve their familiarity
  with foreign consumers and competitors, Amit and
  Zott point out. That, in turn, can help them
  boost their foreign sales and market share.
  That's especially important for, say, an Israeli
  firm listing on Nasdaq because Israel's economy
  is dwarfed by the United States'.

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• Hundreds of foreign issuers have had their equity
  listed on European, North American, and Japanese
  equity markets for years.
• WHY?

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• At the same time, there is a growth in listings
  on some of Europes new marketsmarkets
  designed to meet the needs of young, high-growth
  companies seeking new capital.
• More flexible listing standards, but their
  financial reporting and corporate governance
  standards are often more STRINGENTwhy? RISK!

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Major Equity Markets

• North America, especially NYSE and NASDAQ
• AsiaJapan, PRC, Asian Tigers of Singapore,
  Hong Kong, Taiwan, Thailand
• Market meltdown of July, 1997
• Critics suggest that Asian accounting and
  political practices deter potential investors.

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• Western Europe is now the second largest equity
  market in terms of market capitalization and
  trading volume. There was dramatic growth of
  many Western European markets in the second half
  of the 1990s.
• Economic growth
• Shift toward equity financing (as opposed to
  government ownership or debt)

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• The growth of an equity culture in Europe has
  encouraged the equity markets in the European
  countries to become more similar.
• This convergence is one step toward market
  integration, when location is no longer a
  relevant variable
• However, European markets are still fragmented,
  and cross-border trading is still expensive,
  which is a barrier to integration.

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Fragmentation

• Decreased by technology and competition
• Increased by language, culture, legal, tax, and
  market regulation differences
• In Europe, the threat and the promise of the
  European Unionnationalism, vs. integration and
  the power of size

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Reasons for cross-border listings

• Broaden the shareholder base
• Promote awareness of products
• Promote awareness of the company
• Are these goals met?
• Not usually Thinly traded listings, few local
  shareholders, and decreasing number of listings

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Stock Exchange Alliances and Mergers

• Alliances and mergers have made the European
  capital market interactions complex
• Alliances involve the sharing of various stock
  exchange functions including marketing, listing,
  order routing, information dissemination, order
  execution, matching, clearing, settlement, and
  administration

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• The impetus is cost containment, which would lead
  to a competitive advantage
• The alliances are to benefit each participant,
  but the participants are rivals, which is a
  barrier to cooperation

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What are the current issues?

• International accounting standards (IFRS)
• Formerly called IASs.

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