Chapter 1
International Accounting
and
International Business
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
National Differences in
Accounting Standards
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Many different systems throughout the world
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Accounting systems
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Evolve
Reflect the environments they serve
Development of accounting influenced by

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Reconciliation is still a challenge
Educational, Legal & Political systems
Sociocultural characteristics
Moving toward uniformity of Acctg. Standards

Why do you feel uniformity is important?
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Reasons for International
Involvement

Expand sales
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Excess capacity
Greater profit potential
Gain access to
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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

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Exports and imports of goods and services
Strategic alliances
 Licensing agreement (intangible property)
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Franchise agreement (Holiday Inn, McDonald’s)
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Intangible property: production process, formula, design, patent,
invention
Firms earn a return on the intellectual property without having the
take risk of expanding abroad using capital
Use of trademark with brand name recognition
Investment abroad
 Direct investment – companies acquire degree of control of
foreign corporation to influence management decisions
 Joint venture- two or more firms involved in establishing a
venture.
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Multinational Enterprises

Possess a worldwide view of
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Elite MNE
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Production
Sourcing of raw materials and components
Final markets
Generally no less than10% 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 (esp high tech firms)
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Export and import
Manufacture products abroad or outsource
production (Accounting firms with India?)
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
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Assessment of
 External environment
 Internal capabilities of the firm
Environmental constraints
 Educational: literacy, access to specialized/higher education:
attitude toward education / quality
 Sociocultural: attitude toward managers/authority,
interorganizational cooperation, attitude toward success, class
structure, attitude toward wealth, risk
 political and legal: legal rules, stability, foreign policy
 Economic: International trade patterns, financial organization
 Country-specific advantages (cheap materials, labor)
Firm-specific advantages – intangible assets
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Environmental Influences on
Accounting
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Enterprise ownership – need for public accountability/disclosure
 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 – presence
of Big four and other international firms
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Judgmentally based accounting systems
Depends upon accounting education and
research
Political system – accounting system reflects
political philosophy
Social climate – attitude of informing
employees /level of employee awareness
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Environmental Influences on
Accounting
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Economic growth and development – uniformity
toward treatment of intangibles etc.
Inflation leads to
alternative approaches
such as deviation from historical cost principles
Legal system and regulation of accounting
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Civil codes (France and Germany)
Common law (U.S. and U.K.) – Post SARBOX
Culture (societal or national values)
International factors
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Colonial influence – use methods of relative countries
Membership in Regional trade blocs (European Union)
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Accounting Standards and
Traditions

International Accounting Standards Board
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Former socialist economies are adjusting
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Works for convergence
Russia and Eastern Europe – making transition to market
approach
British and continental European traditions are now
being coordinated
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Major Development Factors
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Corporations recognized as legal entities with limited liability
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Professional management
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Why was limited liability important for developing accounting rules? – Need
for transparency
Protects shareholders and creditors – esp publicly traded corporations
Other factors of a corporate entity?
Separation of ownership v. control – possible lack of goal congruence
Less of an issue in family owned businesses / closely helds
A point of controversy
Emergence of securities markets
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Raises capital for corporations to expand operations
Fundamental element of the transition to a market economy
Shows need to attract foreign investment – such GAAP issues as
comparability, going concern, transparency
Broadened disclosure – Increased importance of financial analysts.
Fundamental to emerging markets such as China, Eastern Europe, Latin
America
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Corporate Disclosure

Disclosure/access to detailed financial data to
finance providers can be seen as a spectrum
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Accounting disclosure
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Least disclosure – shareholders and investors –
Shareholder control myth- so SH really control the entity.
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
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2004 – trading volume of non-U.S. firms listed on
NYSE was 10.5% of the Exchange’s total trading
volume
Consolidation of European exchanges
Exchanges in developing countries are
growing
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
A Wider Audience
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Increased disclosure to other groups
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Expectations of nonfinance providers
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Employees, trade unions, consumers,
government agencies, and the general public
Investment decisions
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
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Demand for greater disclosure by the host
country can be a bargaining tool MNE view

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Just a part of global operations
Some MNEs have acted in ways detrimental to a
host country – Tax Avoidance/evasion / Political
Interference/Discriminatory Practices
Host country’s view

Business activities of an MNE are of primary
concern – Why? How does host country benefit?
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Accountability and
Multinational Enterprises

Domestic Corporations

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Primary operations in one country
Cross-frontier relationships with unrelated parties
Multinational Enterprises

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Operate in many countries with different laws and
currencies
Significant volume of transactions between units
located in different countries
Provides opportunities to coordinate prices –
transfer pricing rules…hot button for U.S. Tax
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Accounting Aspects of
International Business -Evolution

Exposure to International Accounting

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First Exposure: Importing or exporting
 Letters of credit / Customs regulations / Financial
statements (translation / interpretation) if not listed in
Standard/Poors international credit ratings
Costs of outside expertise
 Increase with increased trade
 Should develop in-house experts
 Separate organization to handle international trade
Possible Establishment of a foreign unit or even a wholly
owned subsidiary – new issues relating to foreign presence
and adherence to foreign rules (accounting and otherwise)
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
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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