International Accounting
& Multinational
Enterprises
Lee H. Radebaugh
Sidney J. Gray
Ervin L. Black
6th edition
John Wiley & Sons, Inc.
Chapter 1
International Accounting
and
International Business
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
The International Development of
the Accounting Discipline

Double-entry accounting



Luca Pacioli – Summa de Arithmetica


Developed in Italy between the 13th and 15th Centuries
Spread to other European countries
Memorandum book, journal, and ledger
Adapted due to changes in



Business form
Taxation
Globalization
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
National Differences in
Accounting Standards

Many different systems throughout the world


Accounting systems



Reconciliation is still a challenge
Evolve
Reflect the environments they serve
Development of accounting influenced by




Educational systems
Legal systems
Political systems
Sociocultural characteristics
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
The Evolution and Significance of
International Business




Began with the Greeks around the fifth
century B.C.
Trade became a privilege granted by the
state
16th and 17th centuries saw the first major
foreign investments (colonies)
Center of commercial and business activity
shifted westward
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
The Evolution and Significance of
International Business

Industrial Revolution



Multinational firms developed – Ford, Singer
Foreign investments become more influential
Post-World War II Period


International business stunted
 Great Depression
 World War II
Renewal in foreign trade and investment
 Formation of European Economic Community (now the
European Union)
 Greater stability
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Reasons for International
Involvement

Expand sales



Excess capacity
Greater profit potential
Gain access to




Raw materials
Other factors of production (cheap labor)
Knowledge
New developments in technology
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Forms of International
Involvement


Exports and imports of goods and services
Strategic alliances



Licensing agreement (intangible property)
Franchise agreement (Holiday Inn, McDonald’s)
Investment abroad


Direct investment
Joint venture
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Multinational Enterprises

Possess a worldwide view of




Elite MNE



Production
Sourcing of raw materials and components
Final markets
10% of a company’s overall assets, earnings, and
employees are abroad
Significant geographical spread
International experience of executives
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Multinational Enterprises
Firm Size and
Saturation of
Domestic Market

Probability of
International
Transactions
Small companies



Export and import
Manufacture products abroad or outsource
production
Licensing agreements.
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Large Multinational
Enterprises
Top 10 Companies by Market Value in 2004
Source: Business Week Global 1000
Rank
Name
Country
Market Value
($ Billions)
2004
2003
1
1
General Electric
U.S.
328.11
2
2
Microsoft
U.S.
284.43
3
3
Exxon Mobil
U.S.
283.61
4
4
Pfizer
U.S.
269.66
5
5
Wal-Mart Stores
U.S.
241.19
6
6
Citigroup
U.S.
239.43
7
9
BP
Britain
193.05
8
10
American International Group
U.S.
191.18
9
13
Intel
U.S.
184.66
10
8
Royal Dutch Petroleum
Netherlands
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
174.83
Large Multinational
Enterprises
Top 10 Companies by Sales in 2003
Source: Fortune Global 500
Rank
Name
Country
Sales
($ Billions)
2003
2002
1
1
Wal-Mart Stores
U.S.
263.00
2
5
BP
Britain
232.57
3
3
Exxon Mobil
U.S.
222.88
4
4
Royal/Dutch Shell Group
Britain/Neth.
201.73
5
2
General Motors
U.S.
195.32
6
6
Ford Motor
U.S.
164.51
7
7
DaimlerChrysler
Germany
156.60
8
8
Toyota Motor
Japan
153.11
9
9
General Electric
U.S.
134.18
10
14
Total
France
118.44
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Deciding to Become Global

Assessment of



Environmental constraints



External environment
Internal capabilities of the firm
Educational, sociological, political and legal, and
economic
Country-specific advantages (cheap materials,
labor)
Firm-specific advantages – intangible assets
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Environmental Influences on
Accounting




Enterprise ownership
 Broad ownership
 State ownership
 Family ownership
Business activities influence the nature of the accounting system
Sources of finance and pressure for accountability
 External shareholders
 Banks
 Family sources
Taxation
 Accounting systems influenced by state objectives (France)
 Accounting systems separate from state objectives (U.S.)
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Environmental Influences on
Accounting

Developed accounting profession




Judgmentally based accounting systems
Depends upon accounting education and
research
Political system – accounting system reflects
political philosophy
Social climate – level of employee awareness
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Environmental Influences on
Accounting



Economic growth and development
Inflation leads to
alternative approaches
Legal system and regulation of accounting




Civil codes (France and Germany)
Common law (U.S. and U.K.)
Culture (societal or national values)
International factors


Colonial influence
Regional trade blocs (European Union)
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Accounting Standards and
Traditions

International Accounting Standards Board


Former socialist economies are adjusting


Works for convergence
Russia and Eastern Europe
British and continental European traditions are now
being coordinated
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Major Development Factors

Corporations recognized as legal entities with limited
liability


Professional management


Protects shareholders and creditors
A point of controversy
Emergence of securities markets



Fundamental element of the transition to a market
economy
Shows need to attract foreign investment
Broadened disclosure
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Major Development Factors
Exhibit 1.2: Market Capitalization by National
Securities Market (Top 5 Countries)
United States
26%
Great Britain
Japan
43%
France
Rest of the World
4%
7%
20%
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Corporate Disclosure

Disclosure to finance providers can be seen as a
spectrum



Accounting disclosure


Least disclosure – shareholders and investors
Varied disclosure – depends on the purpose of the
disclosure and the power of the finance provider
Used as a means of national economic planning and
control (Examples – France and Sweden)
Accounting professionals

Played a key role in developing accounting systems
(Examples – U.S. and U.K.)
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Trends in Securities Markets

Strong move to attract foreign companies to
list on exchanges



2004 – trading volume of non-U.S. firms listed on
NYSE was 10.5% of the Exchange’s total trading
volume
Consolidation of exchanges
Exchanges in developing countries are
growing
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
A Wider Audience

Increased disclosure to other groups


Expectations of nonfinance providers



Employees, trade unions, consumers,
government agencies, and the general public
Not clearly defined
Techniques to measure them do not exist
Less developed countries have less
accountability and disclosure
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Accountability and
Multinational Enterprises


Demand for greater disclosure by the host
country can be a bargaining tool
MNE view



Just a part of global operations
Some MNEs have acted in ways detrimental to a
host country.
Host country’s view

Business activities of an MNE are of primary
concern
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Accountability and
Multinational Enterprises

Domestic Corporations



Primary operations in one country
Cross-frontier relationships with unrelated parties
Multinational Enterprises


Operate in many countries with different laws and
currencies
Significant volume of transactions between units
located in different countries
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Accounting Aspects of
International Business

Exposure to International Accounting


Importing or exporting
Costs of outside expertise





Increase with increased trade
Should develop in-house experts
Separate organization to handle international trade
Establishment of a foreign unit
Awareness of international market conditions

Lower cost of capital
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
The Field of International
Accounting

Descriptive/comparative accounting
 Important issues

Forces and conditions that create international differences
Trend toward convergence
International transactions/multinational enterprises
 Important issues








Financial reporting problems
Translation of foreign currency financial statements,
Information systems
Budgets and performance evaluation
Audits
Taxes
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black