Bài giảng International Business - Chapter twenty-One: Financial Management and Accounting

Learning Objectives Explain capital structure choices and their impact on the MNC Describe the process of multilateral netting and its contribution to cash flow management Describe the importance of leading and lagging in cash flow management Categorize foreign exchange risks into transaction exposure, translation exposure, and economic exposure Describe the basic idea of a swap transaction and its applications

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Financial Management and AccountingMcGraw-Hill/IrwinInternational Business, 11/eCopyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.chapter twenty-oneLearning ObjectivesExplain capital structure choices and their impact on the MNCDescribe the process of multilateral netting and its contribution to cash flow managementDescribe the importance of leading and lagging in cash flow managementCategorize foreign exchange risks into transaction exposure, translation exposure, and economic exposureDescribe the basic idea of a swap transaction and its applications3Learning ObjectivesExplain a currency swap contract and its usefulness to the financial managerRecognize the usefulness and dangers of derivativesExplain the role of and approaches to sales without moneyIdentify the major challenges faced in international accountingDescribe the international accounting standards’ convergence process and its importance4Capital Structure of the FirmRetained earningsDebt Offshore financial center specializes in financing nonresidents, low taxes and few banking regulationsEquityAmerican depository receipts (ADRs): foreign shares held by a custodian in the issuer’s home market and traded in dollars on the U.S. exchange5Financial Management DecisionsIn what currency should capital be raised?How structured: equity, debt?What sources of capital?If capital market, which ones? Are other sources of money available?How much and for how long?6Cash Flow ManagementMultilateral NettingSubsidiaries transfer net intracompany cash flows through a centralized clearing center7Cash Flow ManagementLeading and LaggingTiming payments early (lead) or late (lag), depending on anticipated currency movements, so they have the most favorable impact 8Foreign Exchange Risk ManagementTransaction exposure Change in the value of financial position created by foreign currency changes between establishment and settlement of contractTranslation exposure Potential change in value of a company’s financial position due to exposure created during consolidation processEconomic exposure Potential for value of future cash flows to be affected by unanticipated exchange rate movements9Transaction Exposure: HedgingHedgingprocess to reduce or eliminate financial risk Forward market hedgeForeign currency contract sold or bought forward in order to protect against foreign currency movementCurrency option hedgeOption to buy or sell specific amount of foreign currency at specific time to protect against foreign currency riskMoney market hedgeMethod to hedge foreign currency exposure by borrowing and lending in domestic and foreign money markets10Transaction Exposure: SwapsSwap contractSpot sale/purchase of asset against future purchase/sale of equal amount in order to hedge financial positionBank SwapSwap made between banks to acquire temporary foreign currenciesCurrency SwapExchange of debt service of loan or bond in one currency for debt service of loan or bond in another currency11Transaction Exposure: Swaps cont’d.Interest Rate SwapExchange of interest rate flows to manage interest rate exposureSpot and forward market swapsUse spot and forward markets to hedge foreign currency exposureParallel LoansMatched loans across currencies made to cover risk 12Translation ApproachesCurrent rate methodCurrent assets and liabilities are valued at current spot rates and noncurrent assets and liabilities are translated at historic exchange rates Temporal method Monetary accounts are valued at spot rate and accounts carried at historical cost are translated at historic exchange rates13Hedges and Swaps as “Derivatives”Contract whose value is tied to the performance of a financial instrument or commodity14Sales Without MoneyCountertradeThe trade of goods or services for other goods or services (6 varieties)CounterpurchaseGoods supplied do not rely on the goods importedCompensationDeveloping country makes payment in products produced by use of developed country equipmentBarterDirect exchange of goods or services for goods or services15Sales Without Money, cont’d.Switch TradingUse of third party to market products received in countertradeOffsetTrade arrangement that requires portion of the inputs be supplied by receiving countryClearing account arrangementsProcess to settle trading account within specified time16Industrial CooperationAn exporter’s commitment to a longer-term relationship than that in a simple export sale, in which some of the production occurs in the receiving country (five methods)Joint VentureCoproduction and specializationSubcontractingLicensingTurnkey plants17Taxation and Transfer PricingIncome taxDirect tax levied on earningsValue-added tax (VAT)Indirect tax collected from parties as they add value to productWithholding taxIndirect tax paid by payor, usually on passive income18Taxation and Transfer PricingTransfer PriceThe cost of intracompany sale of goods or services19International AccountingAccounting and Foreign CurrencyConsolidation Process of translating subsidiary results and aggregating them into one financial reportFunctional CurrencyPrimary currency of a business20Cultural Differences in Measurement and Disclosure for Accounting Systems21Convergence of Accounting StandardsFinancial Accounting Standards Board (FASB)U.S. Generally Accepted Accounting Principles (U.S.GAAP)International Accounting Standards Board (IASB)International Financial Reporting Standards (IFRS)22Use of International Financial Reporting Standards23Triple Bottom-Line Accounting3BLA results or impact report on the environmental, social, and financial impacts of the business24