Libby, Libby and Short

1
CHAPTER
International Issues in Managerial Accounting
2
Objectives
1. Explain the role of the management accountant
in the international environment. 2. Identify the
varying levels of involvement that firms can
undertake in international trade. 3. List the
ways management accountants can manage foreign
currency risk. 4. Explain why multinational firms
choose to decentralize.
After studying this chapter, you should be able
to
3
Objectives
5. Describe how environmental factors can affect
performance evaluation in the multinational
firm. 6. Discuss the role of transfer pricing in
the multinational firm. 7. Discuss ethical issues
that affect firms operating in the international
environment.
4
Where does the management accountant fit into the
global business environment?
5
Business looks to the management accountant for
international financial and business expertise.
6
Management Accounting in the International
Environment
Skills needed by management accountants

• Politics
• Economics
• Marketing
• Management
• Information Systems Technology

7
Multinational Corporation (MNC)

• A multinational corporation (MNC) is one that
  does business in more than one country in such a
  volume that its well-being and growth rest in
  more than one country.

8
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.

9
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.

Example San Antonio
Example New Orleans
10
Example of the Advantages of Operating a Plant in
a Foreign Trade Zone
Roadrunner, Inc. operates a petrochemical plant
in a foreign trade zone. Wilycoyote, Inc.
operates an identical plant just outside the
foreign trade zone. Both plants purchase
400,000 of crude oil from Venezuela.
11
Example (continued)
Roadrunner Wilycoyote
Duty paid at purchase 0 24,000
Wilycoyote pays duty at the point of purchase (6
of 400,000).
Carrying costs of duty 0 1,920
Duty paid at sale 16,800 0
Total duty-related carrying costs (0.12 x 8/12 x
24,000)
Roadrunner pays duty at point of sale because it
is in a foreign trade zone.
12
Example (continued)
Total duty and duty- related
costs 16,800 25,920
Clearly the advantage approach
13
A company may choose to purchase an existing
foreign company, making the purchased company a
wholly owned subsidiary.
If the laws of the country permit, an
multinational corporation can simply set up a
wholly owned subsidiary or branch office in the
country.
14
Outsourcing is the payment by a company for a
business function formerly done in-house, such as
payment for legal needs to outside firms.
Outsourcing of technical and professional jobs is
becoming an important issue for cost-conscious
U.S. firms.
15
A joint venture is a type of partnership in which
investors co-own the enterprise. A special case
of joint venture cooperation is the maquiladoraa
manufacturing plant located in Mexico which
processes imported materials and reexports them
to the United States.
16
Foreign Currency Exchange
Kinds of risks

• Currency risk management
• Transaction risk
• Economic risk
• Translation (accounting ) risk

17
A Transaction Risk Example
SuperTubs, Inc., a U.S. firm, sells its line of
whirlpool tubs to Bonbain, a French distributor.
On January 15, Bonbain orders 100 tubs at 1,000
per tub to be paid with French francs on March
15. The exchange rate on on January 15 is seven
francs per dollar or 700,000 francs. Suppose
that on March 15 the exchange rate is 7.1 francs
per dollar. A 1,408 loss is experienced by
SuperTubs, Inc.
Receivable in dollars on Jan. 15 100,000 Received
in dollars on March 15 (700,000/7.1) 98,592
Exchange loss 1,408
18
A Transaction Risk Example
If the franc had strengthened against the dollar
to a rate of 6.9 francs per dollar, a 1,449 gain
would occur
Receivable in dollars on Jan. 15 100,000 Received
in dollars on March 15 (700,000/6.9) 101,449
Exchange gain 1,449
19
One way of insuring against gains and losses on
foreign currency exchanges is hedging.
20
Managing Economic Risk
Economic risk is the impact of exchange rate
fluctuations on the present value of a firms
future cash flows.
Example
A U.S. consumer can choose to purchase heavy
equipment from either Caterpillar (U.S.) or
Komatsu (Japan). A piece of equipment is 80,000
from either maker. At an exchange rate of 1
equals 130 yens, the price is set. Assume the
dollar strengthens so the exchange rate becomes
1 equals 140 yens. This lowers Katmatsus price
to 74,286.
21
Managing Translation Risk
Example
Multinational, Inc., has a foreign division, FD,
which has been experiencing eroding sales.
Multinational directs FD managers to increase
marketing expenditures over the following four
quarters
A 10 increase each quarter
22
Managing Translation Risk
Example (continued)
Suppose that the dollar has strengthened against
the local currency and the quarterly exchange
rates of 1 for units of local currency are 1.00,
1.2, 1.35, and 1.50, respectively.
It looks like FD has decreased expenditures.
23
Advantages of Decentralizationin 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.

24
Measuring Performance in the Multinational Firm
It is particularly difficult to compare the
performance of a manager of a division in one
country with the performance of a manager of a
division in another country.
25
Measuring Performance in the Multinational Firm
An example of misleading results
Assets Revenues Net Income Margin
Turnover ROI
Brazil 10 6 3 0.50 0.60 0.30 Canada
18 13 10 0.77 0.72 0.55 Spain
15 10 6 0.60 0.67 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.
26
Environmental Factors Affecting Performance
Evaluation in the MNC

• Economic Factors
• Organization of central banking system
• Economic stability
• Existence of capital markets
• Currency restrictions

Adapted from Wagdy M. Abdallah, Change the
Environment or Change the System, Management
Accounting (October 1986) pp. 33-36.
27
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

Adapted from Wagdy M. Abdallah, Change the
Environment or Change the System, Management
Accounting (October 1986) pp. 33-36.
28
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

Adapted from Wagdy M. Abdallah, Change the
Environment or Change the System, Management
Accounting (October 1986) pp. 33-36.
29
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

Adapted from Wagdy M. Abdallah, Change the
Environment or Change the System, Management
Accounting (October 1986) pp. 33-36.
30
Income Taxes and Transfer Pricing
Action
Tax Impact
Belgian subsidiary of parent 42 tax rate company
produces a component 100 revenue 100 at a
cost of 100 per unit. Title to cost 0 the
component is transferred to a Taxes paid
0 reinvoicing center in Puerto Rico at a
transfer price of 100 per unit.
31
Income Taxes and Transfer Pricing
Action
Tax Impact
Reinvoicing center in Puerto Rico, 0 tax
rate also a subsidiary of parent company 200
revenue 100 transfers title of component to
U.S. cost 100 subsidiary of parent company at
a Taxes paid 0 transfer price of 200 per unit.
32
The IRS allows three pricing methods that
approximate arms-length pricing (shown in the
order of preference)

• Comparable uncontrolled price method
• Resale price method
• Cost-plus method

33
Questions to Ask Concerning Ethics in the
International Environment
Is the action right legally? Is the action right
morally?
34
Chapter Fourteen
The End
35
(No Transcript)