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 Explain the role played by accounting in formulating multinational business strategy.
 Demonstrate an understanding of multinational capital budgeting.
 Describe the factors that influence strategy implementation within a multinational corporation.
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 Discuss the role of accounting in implementing multinational business strategy.
 Identify issues involved in the design and implementation of an effective performance evaluation system within a multinational corporation.
 Explain the impact of cultural diversity on strategic accounting issues within a multinational corporation.
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 Large scale plans
 Reflect future direction
 Categories
 Strategy formulation
 Determining organizational goals
 Strategies to achieve goals
 Strategy implementation
 Managerial efforts
 Attain organizational goals
 Performance evaluation
 Extent of goals achieved
 Accounting
 Significant role
 Strategy formulation
 Implementation
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 Analysis of information
 Internal factors
 Culture, skills and know-how
 External Factors
 Customer, market, and competitor
 Regulatory, social, and political factors
 Financial expressions
 Firm strategy
 Preparation of budgets
 Capital budgeting
 Important part of strategy formulation
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 Primary contribution of accounting
 Assists in strategy formulation
 Information to managers
 Short-term responsibilities
 Long-term planning responsibilities
 Provides future expectations
 Future results can be judged
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 Key activity in selecting capital investments
 Capital investments
 Involve large amount of resources
 Cost and benefit over large periods of time
 Three steps
 Project identification and definition,
 Evaluation and selection
 Monitoring and review
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 Four techniques
 Payback period
 Return on investment
 Net present value
 Internal rate of return
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 Length of time
 Recoupment of initial investment
 Knowledge required
 Initial investment amount
 Annual after-tax cash flows
 Project accepted
 Payback period within predetermined length
 Primary weaknesses
 Ignores time value of money
 Ignores total profitability of project
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Return on investment
 Average annual return
 On initial investment
 Equals
 Average annual net income divided by
 Initial investment
 Project accepted if
 Return on investment over predetermined rate
 Primary weaknesses
 Ignores time value of money
 Ignores possible cash outlays subsequent to initial investment
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 Present value of net future cash flows less
 The initial investment
 Requires
 Estimate of minimum rate of return
 Used as discount rate
 Project accepted if
 Net present value is equal to or greater than zero
 Primary weaknesses
 Not used for comparing projects
 Of different sizes
 Biased toward large investments
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Internal rate of return
 Discount rate
 Causes net present value of future cash flows to equal
 Initial investment
 Results in zero net present value
 Project accepted if
 IRR more than desired rate of return
 Primary weaknesses
 Requires unrealistic reinvestment assumptions
 Difficult manual calculation
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 Requires
 Initial investment required
 Estimated future cash flows
 Discount rate for present values
 Complicated factors
 Risk associated with future cash flows
 Political risk
 Economic risk
 Financial risk
 Taxes, import duties
 Dividend restrictions
 Cash flow limitations imposed by governments
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 Political events impact cash flows
 Extreme form
 Nationalization
 Expropriation of assets
 Changes in foreign exchange controls
 Repatriation restrictions
 Tax rules
 Labor laws
 Varies significantly from one country to another
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 Impact on cash flows
 Host country economy changes
 Inflation
 Most significant risk
 Affects local population’s purchasing power
 Impacts business’s overall cost structure
 Costs associated with
 Manager time
 Effort to respond to inflation
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 Impact on cash flows
 Changes in currency values
 Interest rates
 Other financial factors
 Foreign exchange risk
 Important component of financial risk
 Foreign exchange risk affects
 Evaluation of project based on
 Host country cash flows
 Parent country cash flows
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 Factors considered
 Project perspective
 Taxes
 Rate of inflation
 Political risk
 Parent company perspective
 Form of cash remittance to parent company
 Expected changes in exchange rate
 Over project life
 Political risk
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EXHIBIT 13.4
Framework for Strategy Implementation
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Management control
 Planning
 Effectively implements strategy
 Coordinating organization activities
 Communicating with organizational members
 Information Evaluating
 Action decision
 Influencing organizational members
 Change their behavior
 Consistent with organization’s strategy
 Important issue
 Delegation of decision-making authority
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Management control
 Factors influencing effective control system
 Organizational structure
 Strategic role assigned to subsidiaries
 Forms of organizational structures
 Ethnocentric
 Assumes universal cultural background of firm
 Polycentric
 Host country culture is important and adopted
 Geocentric
 Synergy of ideas of different countries
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 Expresses long-term strategy within shorter time frames
 Provides mechanisms to
 Translate organizational goals in financial terms
 Assign responsibilities
 Assign scarce resources
 Monitor actual performance
 Targets to achieve
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Exhibit 13.6—Influences Affecting the Operating
Environment of Subsidiaries in Foreign Countries
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 Major aspects for evaluating foreign operations
 Performance evaluating measures
 Classification of foreign operations
 Cost
 Profit
 Investment center
 Issues
 Evaluation of the foreign operation
 Evaluation of manager of operation
 The profit measurement method
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 Financial criteria
 Measures based directly on financial statement data
 Net profit
 Return on investment
 Comparison of budgeted to actual profit
 Nonfinancial criteria
 Measures not based directly on financial statements
 Market share
 Relationship with host country government
 Labor turnover
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 Balanced scorecard
 Balanced consideration to
 Financial
 Nonfinancial measures
 Four perspectives
 Financial perspective
 Customer perspectives
 Internal business process perspective
 Innovation and learning perspectives
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EXHIBIT 13.12—Basic Model of a Balanced
Scorecard Performance System
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 Foreign affiliate held accountable as
 Cost centers
 Produce output using available resources
 Profit centers
 Responsible for costs and revenues
 Investment centers
 Responsibilities of profit center plus
 Responsibility for investment decisions
 Return on investment (ROI)
 Most common performance measure
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Separating managerial and unit performance
 Separating performance evaluation
 Managerial performance
 Unit performance
 Uncontrollable items
 Local manager has no control
 No permission to manage
 Controlled by the parent
 The host government
 Controlled by others
 Responsibility accounting
 Managers not accountable
 For uncontrollable items
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 Controlled by the parent company
 Sales and cost
 Determined by transfer pricing
 Allocation of corporate expenses
 Interest expense
 Controlled by the host government
 Foreign exchange spending restrictions
 Price controls
 Local content laws
 Controlled by others
 Labor strikes
 Foreign exchange loss
 Power outrages
 War, riots, and terrorism
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 Profit measured in
 Local currency
 Subsidiary not paying parent currency dividends
 Parent currency
 Subsidiary paying parent currency dividends
 Choice of a translation method
 Whether translation adjustment included in profit
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 Translation for internal purposes
 Financial accounting standards not followed
 Factor influencing translation adjustment in the profit
 Adjustment reflects the impact of change in rates on parent currency cash flows
 Local manager has authority to hedge translation exposure
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Choice of currency in operational budgeting
 Operational budgets
 Include budget-to-actual comparisons
 If actual compared to budget
 In local currency
 Functions of overall budget variance
 Sales volume variance
 Local currency price variances
 In parent currency
 Functions of overall budget variance
 Change in exchange rates
 Sales volume variance
 Local currency price variances
 Exchange rates
 Actual at time of budget
 Projected at time of budget
 Actual at end of budget period
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EXHIBIT 13.17—Combinations for translation of budget and actual results
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 Success of system depends on
 Integration of system and business strategy
 Feedback and review
 Comprehensive measures
 Ownership and support throughout organization
 Fair and achievable measures
 Simple, clear, and understandable system
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 Objectives
 Influence human behavior
 People in different cultures
 React differently to control systems
 Japan more collectivist society than the United States
 Culture affects
 Management style
 Capital budgeting decisions
 Short vs. long payback
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