Accounting 6570

International Accounting and Business

What is International Accounting?

• First level – standards, guidelines, and rules of accounting, auditing, and taxation issued by supranational organizations

• Second level – Company level where international accounting is viewed as the accounting practices and guidelines used to do international business.

• Third level – Broadest level – study of the standards, guidelines, etc. each country uses to practice recording and interpreting business transactions.

International Development of the Accounting Discipline

• Pre-Italian Influence

• Italian influence

• Luca Pacioli (1494 book)

• Subsequent developments– 1673 France: Balance sheet every two years– Industrial revolution beginning in late 1800s

• Fixed assets• Corporate form of business• Taxation

Additional Developments

• Mergers and acquisitions

• International commerce

• Technological changes

• Internal and external reporting and control systems

• Increased foreign trade and investment brought about regional economic groups

National Differences in Accounting Systems

• Accounting systems influenced by environmental factors– Economic factors– Educational systems– Legal systems– Political systems– Socio-cultural systems

• Implications - Language and currency differences

International Business

• All business transactions that involve two or more countries

• Reasons– Expand sales due to excess capacity or small domestic

markets– Gain access to production factors including

• Raw materials• Cheaper labor• Knowledge

– Protect domestic markets– Protect foreign markets

Forms of International Involvement

• Exports

• Imports

• Strategic Alliances – Licensing agreements– Franchising– Management contracts– Joint Ventures

• Foreign Direct Investment (FDI)

• Portfolio Investment

Foreign Direct Investment (FDI) and International Trade

• Acquisitions - Either purchase shares of stock or buy assets of companies in foreign countries

• Greenfield investment - construct a brand new operation in a foreign country

• Major host and investor nations are Luxembourg, France, the U.S., Belgium, and Spain

• Emerging markets- China, India, Russia• U.S., Germany, Japan, France, U.K., China -

largest importers and exporters• Tennessee Trade

Characteristics of National Economies

• Gross National Product (GNP) - value of new goods and services produced by domestic factors of production. (can be produced outside the country by its citizens)

• Gross Domestic Product (GDP) - value of new goods and services produced within a country (produced by its citizens and non-residents)

Characteristics of National Economies

• GNP (GDP) per capita - crude measure of the standard of living in a country; ratio of that country’s GNP (GDP) to its population.

• Index of openness - a measure of the importance of international trade to an economy, calculated as the ratio of exports over total domestic production; higher values indicate more “open” markets

Gross Domestic Product per Capita (est. 2009)

• Liechteinstein (2007) $122,100• Qatar $119,500• Norway $57,400• United States (11th) $46,000• Canada $38,200• United Kingdom $34,800• Germany $34,100• Japan $32,700

GDP (Per Capita) (est. 2009)

• Russia$15,100

• Mexico$13,200

• China $ 6,600• Iraq $ 3,800• India $ 3,100• Afghanistan $ 1,000

Gross Domestic Product (GDP)(est. 2009)

• U.S. – $14.140 trillion (307 million population)• China - $8.758 trillion (1.3 billion population)• Japan - $5.068 trillion (127 million population)• India – $3.570 trillion (1.2 billion population)• Germany - $2.810 trillion (82 million population)• U.K. - $2.128 trillion (61 million population)• Russia – $2,110 trillion (140 million population)• France - $2.097 trillion (64 million population)• Brazil - $2,013 trillion (199 million population)

Global Enterprises

• Multinational Enterprises (MNEs)– Have a worldwide view of production and

markets– 10% of total sales, net income or assets– Executives often have international experience

Foreign Currency

• Foreign currency markets– Spot rates– Forward rates– Direct/indirect rates

• How currency affects investment

• How currency affects exports/imports

• Devaluation

Global Players

• By market value

• By total sales

• By profits

Decision to Become Global

• Environmental Constraints– Educational - literacy, specialized and higher education, attitudes

toward education– Socio-cultural - attitudes toward management, work and wealth,

class structures, nationalism, attitudes toward foreigners– Economic - fiscal and monetary policy, capital markets, economic

stability, openness of markets, balance-of-payments positions, infant industries, unemployment, industrialization objectives

– Legal-political - trade restrictions, tariffs, non-tariff barriers (quotas), exchange control restrictions, political stability

Organizations to Reduce Trade Barriers

• World Trade Organization (WTO)– Formerly GATT

• Regional Cooperations– European Union (EU)

• 1993 Maastrict Agreement

– North American Free Trade Agreement (NAFTA) January 1, 1994

– MERCOSUR (Argentina, Brazil, Paraguay, Uruguay are full members while Bolivia and Chile have associate status)

Global Corporate Strategy

• Polycentric attitude– All operating policies and procedures must be

adjusted to the local environment

• Ethnocentric attitude– Everything the MNE does in the home country

can be transferred to the foreign country, in spite of the environmental differences

Strategies

• Multidomestic - independent subsidiaries

• Global - worldwide view

• Accounting issues?– Financial statements for foreign countries– Consolidation issues– Foreign currency transactions– Management systems– Taxation– Audits and internal control systems