Introduction The basic purpose of accounting is to
provide useful information to prudent users…creditors, 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.
This becomes difficult when dealing with a multinational enterprise…a corporation with foreign operations, foreign transactions, and/or users of the financial information that are in a different domicile than the reporting entity.
External reporting Tax reporting Internal decision-making,
including JIT, CPV, make/buy decisions, NPV of investments, performance evaluations…
Who Uses Accounting Information? Government Creditors Management Owners (private and public) Neighbors Employees Social and environmental activists Unions Others
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
Procedures followed to determine figures are likely to be different and may not be explained…valuation…(i.e., historical cost, fair market value, discounted cash flows) recognition and timing of recognition, and even realization
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 operations…that is, the company’s financial reporting..around the world.
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?
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?
World Capital MarketsNorth America New York, San Francisco, Chicago, TorontoAsia Hong Kong, TokyoAustralia SydneyEurope London, Zurich, Frankfurt, Brussels, Milan, Paris,
Amsterdam, Stockholm, MadridSouth America Buenos Aires, Santiago, Mexico CityAfrica Johannesburg
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
Historical Development of AccountingAncient 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
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
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
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
The Preindustrial Period
Europe: Rise of Mercantilism Right to trade regulated by the state, Colonialism driven by state’s direct
investment in colonies and near-monopolistic control of trade, and
Dominated by Western European Nations.
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.
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.
The Multinational Era
Involvement in International trade is essential for developing nations, and
For the continued economic growth of developed nations.
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”).
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.
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.
Large MNE’s
Indicators: Sales and Market Value, Profits and Return on Shareholders
Equity, and Worldwide stock market
valuations.
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.
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
Firm Specific Advantages
Intangibles that provide a unique firm advantage,
Examples include market-niche capabilities and personnel advantages.
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.
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).
The Field of International Accounting
Increased need for accountants who understand the international accounting environment,
International certification possibilities, and Fascinating career opportunities.
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)
The needs of capital market participants have strongly shaped the development of accounting practice.
The dollar value of cross-border equity listings almost tripled between 1995 and 1999, with over US$500 billion raised during that 5-year period. International offerings in bonds, syndicated loans, and other debt instruments also grew dramatically during the 1990s.
From 1998 through 2001, for example, 405 non-U.S. firms listed on Nasdaq, raising an average of $125.5 million each.
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.
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.
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'.
Hundreds of foreign issuers have had their equity listed on European, North American, and Japanese equity markets for years.
WHY?
At the same time, there is a growth in listings on some of Europe’s “new markets”…markets 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 STRINGENT…why? RISK!
Major Equity Markets North America, especially NYSE and NASDAQ Asia…Japan, 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.
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)
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.
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 Union…nationalism, vs. integration and the power of size
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
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
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