ADVANCED MANAGEMENT
ACCOUNTING
PPT 11 -1
International Issues
in Advanced Management
Accounting
PPT 11 -2
Learning Objectives
 Explain the role of the accountant in the
international environment.
 Discuss the varying levels of involvement that
firms can take in international trade.
 Explain the ways accountants can manage foreign
currency risk.
 Explain why multinational firms choose to
decentralize.
PPT 11 -3
Learning Objectives (continued)
 Explain how environmental factors can affect
performance evaluation in the multinational firm.
 Discuss the role of transfer pricing in the
multinational firm.
 Discuss ethical issues that affect firms operating in
the international environment.
PPT 11 -4
Management Accounting in the
International Environment





Politics
Economics
Marketing
Management
Information Technology
Knowledge needed by
Management Accountant
PPT 11 -5
Multinational Corporation (MNC)
A multinational
corporation (MNC) is one
that “does business in
more than one country in
such a volume that its wellbeing and growth rest in
more than one country.”
PPT 11 -6
Levels of Involvement in
International Trade
Emerging Role of the Multinational Corporation (MNC)
 Importing
 Exporting
 Foreign Trade Zones
 Wholly Owned Subsidiaries
 Joint Ventures
Trade treaties on tariffs are becoming
increasingly important.
PPT 11 -7
Importing and Exporting
Importing is the process
of bringing product in
from a foreign
country.
Exporting is the process
of shipping product to
a foreign country.
PPT 11 -8
Foreign Trade Zones
Foreign trade zones are
areas near a customs port
of entry that are
physically on U.S. soil but
considered to be outside
U.S. commerce.
PPT 11 -9
Foreign Currency Exchange
Kinds of Risks
 Currency risk management
 Transaction risk
 Economic risk
 Translation (accounting ) risk
PPT 11 -10
A Transaction Risk Example
Situation:
Assume a U.S. firm sells products to a French distributor.
On January 1 the French distributor orders 100 units of the product for
$1,000 per unit to be delivered immediately and paid in French francs
on March 15. The exchange rate at the time of sale was 5 francs per
dollar. On March 15, the exchange rate was 5.1 francs per dollar.
Impact of transaction risk:
Receivable in dollars 1/15
Received in dollars on 3/15
Exchange loss
$100,000
98,039
$ 1,961
=======
The purchase of a forward contract can act as a hedge
against transaction risk.
PPT 11 -11
An Economic Risk Example
Situation:
Suppose that U.S. consumers can purchase heavy
equipment from Japanese and U.S. manufacturers
for $50,000. If the purchase is made from Japanese
manufactures at an exchange rate of 105 yen per
dollar, the purchase price is set at 5,250,000 yen. If
the value of the dollar weakens against the yen to
100 yen to the dollar, the cost of the same Japanese
equipment becomes $52,250 for the U.S. customer.
The Japanese Company is less competitive without
a change in its cost structure.
PPT 11 -12
A Translation Risk Example
Situation:
Suppose you are a division manager in Mexico.
Your division earned 320,000 pesos. This up from
200,000 pesos the year before, a hefty 60 percent
increase. Now suppose the income is translated into
dollars. If the exchange rate last year was 1.5 pesos
per dollar and the exchange rate this year is 3 pesos
per dollar, your net income translates into
$133,333 net income last year and $106,667 this
year. This translation results in a 20 percent
decrease in net income.
PPT 11 -13
Advantages of Decentralization
in the MNC
 The quality of information is better at the local
level.
 Local managers in the MNC are capable of a
more timely response in decision making.
 Social, legal, and language barriers are
minimized.
 Valuable training grounds for foreign subsidiary
managers.
PPT 11 -14
Environmental Factors Affecting
Performance Evaluation in the MNC
Economic Factors:
 Organization of central banking system
 Economic stability
 Existence of capital markets
 Currency restrictions
PPT 11 -15
Environmental Factors Affecting
Performance Evaluation in the MNC
Political and Legal Factors:
 Quality, efficiency, and effectiveness of legal
structure
 Effect of defense policy
 Impact of foreign policy
 Level of political unrest
 Degree of governmental control of business
PPT 11 -16
Environmental Factors Affecting
Performance Evaluation in the MNC
Educational Factors:
 Literacy rate
 Extent and degree of formal education and
training systems
 Extent and degree of technical training
 Extent and quality of management
development programs
PPT 11 -17
Environmental Factors Affecting
Performance Evaluation in the MNC
Sociological Factors:
 Social attitude toward industry and business
 Cultural attitude toward authority and persons in
subordinate positions
 Cultural attitude toward productivity and
achievement (work ethic)
 Social attitude toward material gain
 Cultural and racial diversity
PPT 11 -18
Measuring Performance
in the MNC
An example of misleading results:
Assets
Brazil
Canada
Spain
$10
18
15
Revenues Net Income Margin Turnover
$6
13
10
$3
10
6
0.50
0.77
0.60
0.60
0.72
0.67
ROI
0.30
0.55
0.40
Analysis:
On the basis of ROI, it appears that the manager of the Canadian
subsidiary did the best job, while the manager of the Brazilian
subsidiary did the worst job. However, the inflation rate in Brazil
was 100% for the year. After adjusting the asset base for
inflation, the ROI would be 60% for the Brazilian manager.
PPT 11 -19
Income Taxes and Transfer Pricing
Action
Tax Impact
Belgian subsidiary of Parent Company
produces a component at a cost of $100
per unit. Title to component is transferred
to a Puerto Rico division at a transfer
price of $100.
42% tax rate
$0 income
Taxes paid = $0
Reinvoices to U.S. subsidiary at a $200
transfer price
0% tax rate
$100 income
Taxes paid = $0
U.S. subsidiary sells unit to external
company for $200 each.
35% tax rate
$0 income
Taxes paid = $0
PPT 11 -20
Acceptable Transfer Pricing Methods
Subject to IRS Regulations:
 Comparable Uncontrolled Price Method
 Resale Price Method
 Cost-Plus Method
PPT 11 -21
End of Week
PPT 11 -22