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Transcript
Chapter 13:
Strategic
Accounting Issues
in Multinational
Corporations
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
 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.
13-2
Learning Objectives
 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.
13-3
Strategy
 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
13-4
EXHIBIT 13.1 Strategy formulation
13-5
Strategy Formulation
 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
13-6
Budgeting
 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
13-7
Capital Budgeting
 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
13-8
Capital budgeting techniques
 Four techniques
 Payback period
 Return on investment
 Net present value
 Internal rate of return
13-9
Payback period
 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
13-10
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
13-11
Net present value
 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
13-12
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
13-13
Multinational Capital Budgeting
 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
13-14
Political Risk
 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
13-15
Economic Risk
 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
13-16
Financial Risk
 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
13-17
Evaluation of foreign project
 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
13-18
EXHIBIT 13.4
Framework for Strategy Implementation
13-19
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
13-20
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
13-21
Operational Budgeting
 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
13-22
Exhibit 13.6—Influences Affecting the Operating
Environment of Subsidiaries in Foreign Countries
13-23
Performance Evaluation
 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
13-24
Performance evaluation measures
 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
13-25
Performance evaluation
 Balanced scorecard
 Balanced consideration to
 Financial
 Nonfinancial measures
 Four perspectives




Financial perspective
Customer perspectives
Internal business process perspective
Innovation and learning perspectives
13-26
EXHIBIT 13.12—Basic Model of a Balanced
Scorecard Performance System
13-27
Responsibility centers
 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
13-28
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
13-29
Uncontrollable items
 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
13-30
Choice of currency in measuring profit
 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
13-31
Foreign Currency Translation
 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
13-32
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
13-33
EXHIBIT 13.17—Combinations for translation of
budget and actual results
13-34
Implementing performance evaluation
 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
13-35
Culture and management control
 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
13-36
End of Chapter 13
13-37