Bài giảng International Business - Chapter 20: Accounting and Finance in the International Business

International Business 9e By Charles W.L. HillMcGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 20Accounting and Finance in the International BusinessWhat Is Accounting?Accounting is the language of businessit is the way firms communicate their financial positionsAccounting is more complex for international firms because of differences in accounting standards from country to countrydifferences make it difficult for investors, creditors, and governments to evaluate firmsIt is difficult to compare financial reports from country to country because of national differences in accounting and auditing standardsWhat Determines National Accounting Standards?Accounting standards are rules for preparing financial statementsvariables influencing accounting systems include the relationship between business and the providers of capitalpolitical and economic ties the level of inflationthe level of economic developmentthe prevailing culture in a countryAuditing standards specify the rules for performing an auditWhy Are International Accounting Standards Important?The growth of transnational financing and transnational investment has created a need for transnational financial reportingmany companies obtain capital from foreign providers who are demanding greater consistencyStandardization of accounting practices across national borders is probably in the best interests of the world economyThe International Accounting Standards Board (IASB) is a major proponent of standardization of accounting standardsHow Does Accounting Influence Control Systems?The control process in most firms is usually conducted annually and involves three stepsSubunit goals are jointly determined by the head office and subunit managementThe head office monitors subunit performance throughout the yearThe head office intervenes if the subsidiary fails to achieve its goal, and takes corrective actions if necessary Budgets and performance data are usually expressed in the corporate currencyHow Do Exchange Rates Influence Control?The Lessard-Lorange Model -firms can deal with the problems of exchange rates and control in three waysThe initial rate the spot exchange rate when the budget is adoptedThe projected rate the spot exchange rate forecast for the end of the budget pictureThe ending ratethe spot exchange rate when the budget and performance are being comparedWhat Is The Lessard-Lorange Model?Possible Combinations of Exchange Rates in the Control ProcessWhat Is Financial Management?Financial management involvesInvestment decisions –what to financeFinancing decisions –how to finance those decisionsMoney management decisions –how to manage the firm’s financial resources most efficiently Decisions are more complex in international business because of different currencies, tax regimes, regulations on capital flows, economic and political risk, etc. How Do Managers Make Investment Decisions?Financial managers must quantify the benefits, costs, and risks associated with an investment in a foreign countryTo do this, managers use capital budgeting involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present valueIf the net present value of the discounted cash flows is greater than zero, the firm should go ahead with the projectWhy Is Capital Budgeting More Difficult For International Firms?Capital budgeting is more complicated in international businessbecause a distinction must be made between cash flows to the project and cash flows to the parent companybecause of political and economic riskbecause the connection between cash flows to the parent and the source of financing must be recognized How Does Risk Influence Investment Decisions?Political risk - the likelihood that political forces will cause drastic changes in a country’s business environment that hurt the profit and other goals of a businesshigher in countries with social unrest or disorder, or where the nature of the society increases the chance for social unrestEconomic risk - the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a businessHow Can Firms Adjust For Political And Economic Risk?Firms analyzing foreign investment opportunities can adjust for riskBy raising the discount rate in countries where political and economic risk is highBy lowering future cash flow estimates to account for adverse political or economic changes that could occur in the futureHow Do Firms Make Financing Decisions?Firms must consider two factors How the foreign investment will be financed How the financial structure (debt vs. equity) of the foreign affiliate should be configuredMost experts suggest that firms adopt the structure that minimizes the cost of capital, whatever that may be What Is Global Money Management?Money management decisions attempt to manage global cash resources efficientlyFirms need to Minimize cash balances - need cash balances on hand for notes payable and unexpected demandsReduce transaction costs - the cost of exchange multinational nettingHow Can Firms Limit Their Tax Liability?Every country has its own tax policies most countries feel they have the right to tax the foreign-earned income of companies based in the country Double taxation occurs when the income of a foreign subsidiary is taxed by the host-country government and by the home-country governmentHow Can Firms Limit Their Tax Liability?Taxes can be minimized throughTax credits - allow the firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign governmentTax treaties - agreement specifying what items of income will be taxed by the authorities of the country where the income is earnedDeferral principle - specifies that parent companies are not taxed on foreign source income until they actually receive a dividendTax havens - countries with a very low, or no, income tax – firms can avoid income taxes by establishing a wholly-owned, non-operating subsidiary in the countryHow Do Firms Move Money Across Borders?Firms can transfer liquid funds across border viaDividend remittances - the most common method of transferring funds from subsidiaries to the parent Royalty payments and fees -the remuneration paid to the owners of technology, patents, or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade namesHow Do Firms Move Money Across Borders?Transfer prices -the price at which goods and services are transferred between entities within the firmFronting loans -loans between a parent and its subsidiary channeled through a financial intermediary, usually a large international bank