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International Finance EnvironmentToward Accounting Harmonization
Session 1
Ferry Jaolis
Marketing Evangelist
These are confidential sessions. Please refrain from redistributing without written permission from the university.
International Finance #FIN
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Directions
International finance environment and MNCs
Accounting diversity and harmonisation (Europe, East Asia)
Conceptual framework for financial reporting
Presentation of financial statements under standards (IFRS)
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Readings
Textbooks
• International Financial Management, 10th Ed. (Madura)
• Comparative International Accounting, 10th Ed. (Nobes & Parker)
• Intermediate Accounting, 15th Ed. (Kieso, Weygandt, & Warfield)
• IFRS: Practical Implementation Guide & Workbook, 2nd Ed. (Mirza, Orrell, & H
• Financial Accounting, 14th Ed. (Elliot & Elliot)
Online
• www.iasplus.com (Deloitte.)
• www.ifrs.org/Use-around-the-world/Education
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http://www.ifrs.org/Use-around-the-world/Educationhttp://www.ifrs.org/Use-around-the-world/Educationhttp://www.ifrs.org/Use-around-the-world/Educationhttp://www.iasplus.com/http://www.ifrs.org/Use-around-the-world/Educationhttp://www.ifrs.org/Use-around-the-world/Educationhttp://www.iasplus.com/http://www.iasplus.com/
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Structure
Five lectures
Two students’ group presentations — 50%
One final exam (multiple choice) — 50%
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Group Presentations
Causes and examples of international differences (NP 2)
Harmonization in Europe (NP 5.3+13.2)
Conceptual Framework (KWW ch. 2; MHO ch. 2)
Presentation of financial statements IAS 1 (MHO/E ch.3) Accounting on a cash flow basis (Elliott ch. 1)
Accounting on an accrual accounting basis (Elliott ch. 2)
International Auditing (NP ch. 20)
Fraud and internal control (Weygandt et al., ch. 7)
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Agenda
Multinational Corporations (MNCs)
• Goal
• Organizational Structure
• Key Theories
• Common Conduct Methods
• Valuation
Accounting Harmonization
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MNC
Maximize shareholder wealth (stock price)
Shareholder vs. firm’s managers gap (agency problem)
Agency costs (Rubin, 1978)
• Larger in MNCs than purely domestic firms
• Sheer size of the MNC
• Scattering of distant subsidiaries
• Culture of foreign managers
• Subsidiary value versus overall MNC value
Goal and Gap
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Agency Costs
Parent control
• Centralized
• Decentralized
• Mixed
Management
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Agency Costs
Parent control
• Centralized
• Decentralized
• Mixed
Corporate control
• Stock compensation for board members/executives
• Threat of hostile takeover
• Monitoring, intervention by large shareholders
Management
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Agency Costs
SOX (Sarbanes-Oxley Act) – U.S. in 2002
• The critical case of Enron 2001
• Transparency on productivity and financial condition
• Centralized database of information
• Consistent data reporting among subsidiaries
• Automation system to check data discrepancies from norms
• Personal verification toward accountable actions
• Can deter foreign firms from listing in U.S.
Management
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Agency Costs
Environmental
Regulatory
Ethical
Constraints Facing MNCs Managers
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Why Firms Pursue Business Internationally
Comparative Advantage
Imperfect Markets
Product Cycle
Key International Business Theories
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Comparative AdvantageDavid Ricardo (1772 – 1823)
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Comparative AdvantageDavid Ricardo (1772 – 1823)
4 3Tom
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Comparative AdvantageDavid Ricardo (1772 – 1823)
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Comparative AdvantageDavid Ricardo (1772 – 1823)
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Comparative AdvantageDavid Ricardo (1772 – 1823)
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Comparative AdvantageDavid Ricardo (1772 – 1823)
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Comparative AdvantageDavid Ricardo (1772 – 1823)
Specialization increases production efficiency (better job, lower c
Apple, Hasbro, Sony, Volkswagen
U.S. — innovation-led specialization
Germany, Japan — engineering-led specialization
China — manufacture-led specialization
India — innovation-led specialization
Indonesia — manufacture-led specialization
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Imperfect Markets TheoryHymer (1976)
Imperfect = anything that interferes with trade
Factors of productions (e.g. labors, resources) are immobile
There is no perfect competition in the final product market
• Exclusive, permanent control of proprietary tech
• Privileged access to inputs
• Scale of economies
• Control of distribution systems
• Product differentiation (branding, positioning)
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Imperfect Markets TheoryCase: Indonesia for Luxury Goods
Restrictions and barriers to entry issues
Domestic market protection
Decrease luxury products consumptions (consumerism)
Indonesia, luxury cars:
• Whether you produce or import
• 10 – 200% tax on the product price
• Luxury cars (e.g. Ferrari) — 150%
• If you are exporting luxury products, 0% tax
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Product Cycle TheoryHymer (1976)
Market saturation in home base country (primary reason for MNCs)
Information are easily and readily available in home country
Cycle:
• Foreign demand will be first served by exporting
• Foreign market competitions arise as function of others’ learning curve
• CA is retained by offshoring, subsidiaries, birth of MNCs
• Competitions rise again due to learning curve
• MNCs practiced “differentiation” or “positioning”
• First-mover advantage (e.g. the 1st in bringing new techs/innovationsabroad or the 1st entering or creating a market)
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World Wide WebLife cycle is shortened
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I i l E M d
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International Entry Modes
Export/importLicensing
Franchising
Joint ventures Acquisitions
Subsidiaries
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I t ti l T d
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International Trade
Minimal risk due to no capital placement
Walmart mostly import goods from China (low cost)
Online stores
Compare:
• How much is it a piece of Kingston USB stick from Amazon.com?
• How much is it from Walmart?
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Li i
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Licensing
A firm allows usages of tech (copyrights, patents, TM, brands)
In exchange for some fees
Usually non-exclusive (multiple firms serving same market)
Doesn’t control licensees’ business operations
Starbucks licensing with SSP (F&B operator in Europe)
Sprint Nextel Corp. in the UK
Mostly pharmaceuticals and softwares
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F hi i
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Franchising
A firm allows usages of brand name and business practices
In exchange for intial fees and on going royalties
Usually non-exclusive (multiple firms serving same market)
Does control franchisees’ business operations
Initial opening, market-geographic assessment, trainings, suppor
McD, KFC, Pizza Hut, Domino’s, …
Dessange, Bocage, Celio, De Neuville, La Vie Claire, …
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Global Franchise Brand Share 2009
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Global Franchise Brand Share 2009
Asia Europe N. America L. America Pacific Africa
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Franchise Brand Share By Country 2009
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Franchise Brand Share By Country 2009
France Germany Spain Italy UK Netherland
*
* As of 2014Monday, March 21, 16
Joint Ventures
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Joint Ventures
A venture jointly owned and operated by two or more firms
Allows them to marry respective comparative advantages
Mostly because foreign country place restrictions for full subsidia
Must select local firm(s) as partner(s)
Must share technologies, and certain ownership
PMI and Swedish Match AB (boost sales of snus)
General Mills and Nestlé (allowed GM to take advantage of Nestléoverseas sales distribution network)
Xerox and Fuji (Xerox enter Japanese market)
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Acquisitions
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Acquisitions
Great way of penetrating foreign markets
Quickly gain control over foreign operations and market shares
Pfizer (U.S.) acquired Allergan (Irish) – $191 B
Anheuser-Busch InBev (Belgian) acquired SABMiller (UK) – $120 B
Shell (Dutch) acquired BG (British) –$81 B
PMI (U.S.) acquired Sampoerna (INA) – $5.2 B
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PMI Acquired Sampoerna Tbk (INA)
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PMI Acquired Sampoerna Tbk. (INA)
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PMI Acquired Sampoerna Tbk (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
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PMI Acquired Sampoerna Tbk (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
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PMI Acquired Sampoerna Tbk (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
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PMI Acquired Sampoerna Tbk (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
Enormous distribution network
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PMI Acquired Sampoerna Tbk (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
Enormous distribution network
49% tobacco taxes (crisis-proof)
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PMI Acquired Sampoerna Tbk (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
Enormous distribution network
49% tobacco taxes (crisis-proof)
• 65M Indonesians smoke (13.3% CAGR)
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PMI Acquired Sampoerna Tbk. (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
Enormous distribution network
49% tobacco taxes (crisis-proof)
• 65M Indonesians smoke (13.3% CAGR)
• 2nd largest after Russia
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PMI Acquired Sampoerna Tbk. (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
Enormous distribution network
49% tobacco taxes (crisis-proof)
• 65M Indonesians smoke (13.3% CAGR)
• 2nd largest after Russia
• 70% labors are female (low costs)
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PMI Acquired Sampoerna Tbk. (INA)
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PMI Acquired Sampoerna Tbk. (INA)
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
Enormous distribution network
49% tobacco taxes (crisis-proof)
• 65M Indonesians smoke (13.3% CAGR)
• 2nd largest after Russia
• 70% labors are female (low costs)
• Smoking is associated with stress reliever
• Smoking “facilitates” communal relationship
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cqu ed Sa poe a b ( )
PM has only 4% share in Indonesia
Sampoerna has 31% share
87% in clove market (15% CAGR)
Enormous distribution network
49% tobacco taxes (crisis-proof)
• 65M Indonesians smoke (13.3% CAGR)
• 2nd largest after Russia
• 70% labors are female (low costs)
• Smoking is associated with stress reliever
• Smoking “facilitates” communal relationship
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Subsidiaries
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Similar to acquisitions, requires large investmentsPreferred (can be tailored to the firm’s needs)
However, must adapt with local preferences and laws
No rewards until subsidiary is built and customer base establishe
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International Entry Modes
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y
Export/importLicensing
Franchising – semi DFI
Joint ventures – semi DFI
Acquisitions – DFI
Subsidiaries – DFI
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Degree of International Business by MNCs
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g y
18 %
35 %
53 %
70 %
Campbell's Soup Dow Chemical IBM Motorola Nike
Foreign Sales as a % of Total SalesForeign Assets as a % of Total Assets
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Value Management
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g
Domestic + foreign projects involve investment + financing decisiGoal is to maximize overall PV of future cash flows
Maximize the firm’s value
Hence, shareholder wealth
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International Monetary System
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1945 – 1972• Bretton Woods Agreement
• Fixed exchange rates with periodic devaluations
Since 1973
• Floating exchange rates
1999
• EU enacted single currency ( ! )
• Concern with hedging activities
• Concern with other transactions in foreign currency
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Di"erences in Financial Reporting
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Accountants from a country/different countries won’t produceidentical statements
No set of rules covers every event or prescriptive to smallest deta
Judgments (e.g. whether the main users are tax authorities, etc.)
Group of companies (domestic or MNCs) differ in rules
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Di"erences in Financial Reporting
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IASB (International Accounting Standards Board)• IFRS (International Financial Reporting Standards)
European Union
• Directives and Regulations on accounting and financial reporting
U.S.
• GAAP (Generally Accepted Accounting Principles)
Towards Similarity Attempts
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Globalization of Accounting Rules
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Major political issues (dominance of U.S., expansion of EU)Economic globalization
Emergence of global financial markets
Patterns of share ownership (state or private-owned)
Changes in International monetary system
Growth of MNCs
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Accounting and World Politics
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Dominance of U.S. GAAP• Enron case (2001)
• Andersen as accounting firm
Development of International Accounting Standards
• IASC, London, by Lord Benson
Accounting in developing countries
• Strongly influenced by former colonial powers
• Former British colonies – Institute of Chartered Accountants
• French colonies – government based (double entry to published)
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Accounting and Globalization of Economy
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Freer and faster transfer of goods, services, people, tech, ...Foreign Direct Investment (FDI)
• Equity interest in a foreign firm held with the intention of acquiringcontrol or significant influence (i.e. usually consolidated or for thepurpose of acquiring more shares of stocks – >50% to gain control)
• In most cases, securities investment are made with the intention tosell them in the near future
• However, other investments are made with the intent of holding themto extended period (held-to-maturity approach)
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Accounting and Global Financial Markets
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Globalization of stock markets is possible due to• Deregulations of leading national financial markets (e.g. “Big Bang”
the London Stock Exchange in 1986)
• Innovation speed (e.g. new trading tech, new financial instruments)
• Dramatic advances in electronic techs of communication• Growing links between domestic and world financial markets
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Accounting and Global Financial MarketsP bl
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Precise measure of world’s stock market Internationalization are h• Firms need to translate reports for foreign investors
• French firms are listed on Australia, Belgium, Canada, Germany,Luxembourg, the Netherlands, Spain, Sweden, Switzerland, UK, U.S
• New York has the largest number of foreign listings
• Tokyo has the smallest in that regard
• Rise of listing requirements in London, Berlin, Paris, New York
Translations
• Finland: Nokia reports in Finnish+Swedish (2 local language), & Eng• Problem: translating accounting terms
Problems
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Accounting and Share of Ownership
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The nature of investors in listed firms has implications on financiareporting styles
> owner-manager split, > the need for publicly available andindependently audited financial statements
Financial/non-financial controlled (36%) – UK, JPN, US, AUS, IRECAN, FRA, SWZ
Family controlled (30%) – MEX, HKG, ARG
State controlled (18%) – AUSTRIA, SGP, ISR, ITA, FIN, NOR
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Accounting & International Monetary Syste
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1945 – 1972
• Bretton Woods Agreement• Fixed exchange rates with periodic devaluations
Since 1973
• Floating exchange rates
1999• EU enacted single currency ( ! ) – currency is “politically” stable
• Concern with hedging activities (more positive going concern in accreports ) – Hedging=insurance policy (invest in a position that offsets(bets against) former investment, lost on one means gain on others
• Concern with other transactions in foreign currency ( going concern )
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Accounting and MNCs
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Rise of the need for auditingIssues such as translations of foreing subsidiaries finstatements to prepare for consolidated statements
Most MNCs produce consolidated stats in accord w/US GAAP, IFRS
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Comparative & Internationalization of AccThree Major Reasons
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1. Reminds that US or Anglo-Saxon isn’t the only contributors• The Romans (not double entry)
• Muslims (arithmetic and bookkeeping)
• Italian (double entry, spread first across Europe then the world)
• Loanwords: bank, capital, cash, debit, credit, folio, journal• Britain (19th century) – imported Italian double entry, exported
professional accountancy to the rest of the world and EU
• US (20th century) – lead the concepts & practices of management ac
• Japan (20th century) – management acc and control
• English reporting became then mostly universal
Three Major Reasons
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What the Table doesn’t Show
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Rates of growth• Chinese Institute of CPA grown the third largest in the world
Worldwidely, not just national memberships
• Two UK bodies (ACCA, CIMA)
Ratio of accountant per head of population• France (population 60 M, accountants 18,000)
• New Zealand (population 4 M, accountants 29,000)
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Comparative & Internationalization of AccThree Major Reasons
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2. Means to learn from each other (preparers, users, regulators)• Improvement motifs
• Achievements and failures to avoid accounting ethnocentrism
• History in economic, legal, and social are differences that should nodelay harmonization
• UK accepted European ideas on greater layout uniformity in financiastatements
• France, Germany accepted UK and US approach to consolidatedstatements
• US, learned hard from 2001’s Enron case, willing to consideraccounting standards accord to UK and by the IASB
Three Major Reasons
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Comparative & Internationalization of AccThree Major Reasons
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3. Harmonization deemed desirable yet difficult to achieve• Consolidation acc and foreign currency translation have been tackle
significantly in different countries
• One plausible, mostly accepted is FASB (since they are not US GAA
• FASB close to US GAAP, however, and acceptable to most stock-exchange regulators
• IASB is adopted by the EU (to avoid use of US GAAP)
• IASB and FASB race to the top
• Keywords: compromises on both political and technical nature
Three Major Reasons
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Quick Recap
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Clearly, accounting differs from country to countryThe presence of accountancy bodies help unify those differences
Some causes and examples of international differences
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Causes and Examples of Int’l Di"erences
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International cultural differences and acc differences
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Factors A "ecting International Di"erences
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CultureLegal systems
Providers of finance
Taxation
Other external influences
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Culture
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Accounting is affected by its environment, including cultureCulture contains values, affect how society is structured
And how they interact with its substructure
Accounting may be seen as on of those structure
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CultureHofstede (1980)
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Individualism vs. collectivism• Group goals vs. individual freedoms
Large vs. small power distance
• Low trust in younger professionals (high hierarchical manner)
Strong vs. weak uncertainty avoidance• Relaxed vs. paranoid
Masculinity vs. femininity
• Masculine (assertive, achievement, material success)
• Feminine (relationship, harmony, modesty, caring for the weak)
( )
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The 5 PillarsCollectivism vs. Individualism
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Collectivism Individualism
Origins of human rights Gift from government Intrinsic to human being
Supremacy Group Individual
Responsibilities Coercion Freedom to choose
Law mechanism Inequality Equality
State rolePositive (aggressive,
leading, providing)
Negative (defensive,
protecting)
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Individualism vs. CollectivismHofstede (1980)
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Collectivism can be associated with more prudent/conservatist accapproach (i.e. everything is “managed” the state; tax, profit margin,etc.)
• Germany – accounting rules is tax rules
Individualists tend to be more fair and fully disclosure statements, mo
often than not, is required• US – making its own acc standards (GAAP)
( )
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CultureHofstede (1980)
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Individualism vs. collectivism• Group goals vs. individual freedoms
Large vs. small power distance
• Low trust in younger professionals (high hierarchical manner)
Strong vs. weak uncertainty avoidance• Relaxed vs. paranoid
Masculinity vs. femininity
• Masculine (assertive, achievement, material success)
• Feminine (relationship, harmony, modesty, caring for the weak)
( )
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CultureHofstede (1980)
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Larger power distance
• Senior acc bodies / firms
• Pricewaterhouse Coopers, Deloitte, Ernst & Young, KPMG
Shorter power distance
• Mostly professional services, irrespective of brand names• However, more often than not, public have higher trust on bigger firm
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CultureHofstede (1980)
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Individualism vs. collectivism
• Group goals vs. individual freedoms
Large vs. small power distance
• Low trust in younger professionals (high hierarchical manner)
Strong vs. weak uncertainty avoidance• Relaxed vs. paranoid
• Strong uncertainty avoidance demand full disclosure fin statements
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CultureHofstede (1980)
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Individualism vs. collectivism
• Group goals vs. individual freedoms
Large vs. small power distance
• Low trust in younger professionals (high hierarchical manner)
Strong vs. weak uncertainty avoidance• Relaxed vs. paranoid
Masculinity vs. femininity
• Masculine (assertive, achievement, material success)
• Feminine (relationship, harmony, modesty, caring for the weak)• Indonesia: beware, rare transparency, weak law, high corruption
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CultureGray (1998)
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Applied Hofstede’s cultural dimensions to explain Int’l differencesin accountants’ behaviour, hence, the nature of acc practices
Pairs of accounting values
• Professionalism vs. statutory control (authority)—Anglo
• Uniformity vs. flexibility (enforcement)—Asian
• Conservatism/prudent vs. optimism (measurement)—Anglo
• Secrecy vs. transparency (disclosure)—Latin, Germany
• Transparency increased as uncertainty avoidance decreased
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Factors A "ecting International Di"erences
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Culture
Legal systems
Providers of finance
Taxation
Other external influences
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Legal systems
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8/18/2019 International Finance Environment
89/108
Monday, March 21, 16
Legal systems
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8/18/2019 International Finance Environment
90/108
Common law emanates from England and spreaded out
Influences commercial law (traditionally doesn’t prescribe rules tocover behaviours of companies and how to prepare fin statement
Accounting within such context is not specified in detail in law
Accountants establish rules for acc practices (standards)
Monday, March 21, 16
Legal systems
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8/18/2019 International Finance Environment
91/108
Monday, March 21, 16
Legal systems
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8/18/2019 International Finance Environment
92/108
Based on the Roman ius civile (compiled by Justinian 6th century)
Taught in European universities from 12th century onwards
Accounting rules established from this law
Germany’s company accounting is under domestic rules, andtreated as a branch of law
Monday, March 21, 16
Legal systemsImplications on Accounting Practices
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8/18/2019 International Finance Environment
93/108
The nature of acc regulation is affected by its general system of la
Companies in common law countries
• Have higher levels of disclosures (Jaggi & Low, 2000)
• Greater incentives to report losses quickly (Bushman & Piotroski, 2006
Legal systems have weaker effect because some countries mightadopt IFRS for some or all purposes, irrespective of its legal syste
Monday, March 21, 16
Factors A "ecting International Di"erences
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8/18/2019 International Finance Environment
94/108
Culture
Legal systems
Providers of finance
Taxation
Other external influences
Monday, March 21, 16
Providers of FinanceImplications on Accounting Practices
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8/18/2019 International Finance Environment
95/108
Germany, France, Italy, capital is provided by banks (credit)–”insiders”
• Bankers, governments, founding families (have “natural” or “forced” accesto internal information)
• Thus requires less auditing process on the financial reporting
• Dominated by gov’s need of taxable income calculation in the report
UK, US, is by private shareholders (capital market) – “outsiders”
• Often don’t have access to internal information
• Thus emphasize disclosure, audit, and “fair” information
• Two acc rules: one for financial reporting, one for taxable income calculatio
Nevertheless, countries with few listed companies (lower requirement to
publish financial data) move to emphasize audited fin statements
Monday, March 21, 16
Factors A "ecting International Di"erences
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8/18/2019 International Finance Environment
96/108
Culture
Legal systems
Providers of finance
Taxation
Other external influences
Monday, March 21, 16
TaxationImplications on Accounting Practices
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8/18/2019 International Finance Environment
97/108
Taxation regulations determine acc measurements
UK, US – tax rules are different with acc treatment for taxation
• Fixed asset’s depreciation follows as fairly as possible in which the asset’seconomic benefits are consumed by the entity
France, Germany – tax rules are the acc rules
• Fixed asset’s depreciation follows declining balance method, with a changto straight-line depreciation when this results in higher depreciation amou
For UK, US, tax charge against profit isn’t “fair”
For France, Germany, it’s a minor problem
Monday, March 21, 16
Factors A "ecting International Di"erences
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8/18/2019 International Finance Environment
98/108
Culture
Legal systems
Providers of finance
Taxation
Other external influences
Monday, March 21, 16
Other External InfluencesImplications on Accounting Practices
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8/18/2019 International Finance Environment
99/108
Economic events
Economic crisis in US (late 1920s and early 1930s) emphasizeextensive disclosure and state control of acc standards
Level of inflation
• Very high in some South American countries (~100% per year)
• The use of general price-level adjustment (Tweedie & Whittington, 1984)
Monday, March 21, 16
Other External InfluencesImplications on Accounting Practices
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8/18/2019 International Finance Environment
100/108
Influence of theory
• Microeconomics in Netherlands + Dutch law and tax requirements arerelatively loose
• Led to the present diversity of practice
• Allowing accountants to emphasize fairness through judgment (i.e. to
select and present acc figures)• Experimentation with replacement cost accounting
Monday, March 21, 16
Other External InfluencesImplications on Accounting Practices
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8/18/2019 International Finance Environment
101/108
Accountancy profession
• Lower amount of public companies or private shareholders in somecountries means smaller needs for an auditor
• This is in opposite to those in UK or US (auditors needed)
Adoption of standards of the IASB (mostly by EU)
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Some Examples of Di"erencesConservatism and Accruals
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8/18/2019 International Finance Environment
102/108
Conservatism has two meanings
• Tendency to understate profit and assets
• Associated with state’s desire to limit dividends to protect creditors
• Company’s desire to limit taxable income
• The speed with which losses are reported (e.g. in accrual basis–account
payable)
In Germany, bankers are interested in ‘rock-bottom’ figures so they fethat long-term loans are safe (i.e. profits and assets are not reported accrual basis)
Accrual acc basis called ‘prudence’ by IFRS (careful statement, sinceaccruals tend to reflect only prediction, not reality like in cash basis a
Monday, March 21, 16
Some Examples of Di"erencesFinancial Statement Formats
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8/18/2019 International Finance Environment
103/108
Balance sheets vary in two main ways under domestic rules
• In some countries, Assets are displayed in order of decreasing liquidity(cash first) – countries influenced by US GAAP
• In others, increasing order of liquidity (intangible fixed assets come first)countries influenced by EU Directives
• Other variations is shape of financial statement format• Some combine together all debits and then all credits (two-sided, asse
the left),
• Or in a report form a single page (asset at the top)
• Other companies arrange the items in order to calculate TOTALS of Ne
Current Assets and Net Assets (called financial position format)
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ChinaIndia
GDP Composition 2012
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8/18/2019 International Finance Environment
104/108
-15
0
15
30
45
60
Consumption Government Investment Net Exports
Indonesia
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Valuation ModelPurely Domestic
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8/18/2019 International Finance Environment
105/108
E (CF$,t ) = expected cash flows to be received at the end of
period t n = the number of periods into the future in which cas
flows are received k = the required rate of return by investors/WACC
Monday, March 21, 16
Valuation ModelInternational Cash Flow
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8/18/2019 International Finance Environment
106/108
E (CF j,t ) = expected cash flows denominated in currency j to
be received by the U.S. parent at the end of period t E (S j,t ) = expected exchange rate at which currency j can be
converted to dollars at the end of period t k = the weighted average cost of capital of the U.S. paren
company
m
=
the number of multiple currencies from multiple foreigoperationsMonday, March 21, 16
Valuation ModelInternational Cash Flow: MNC Uses Two/More Currencie
C li C h t d h fl f $100 000 f l l b i
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8/18/2019 International Finance Environment
107/108
Carolina Co. has expected cash flows of $100,000 from local business
and 1 million Mexican pesos from business in Mexico at the end ofperiod t. Assuming that the peso’s value is expected to be $.09 whenconverted into dollars, the expected dollar cash flows are:
Monday, March 21, 16
Uncertainty Surrounding an MNC’s CFExposure to foreign economies Exchange rate risk
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8/18/2019 International Finance Environment
108/108
Exposure to FE (e.g. weak PPP) — if [CF j,t < E (CF j,t )] = Value decl
Exposure to PR (e.g. high taxes) — if [CF j,t < E (CF j,t )] = Value dec
Exposure to ERR — if [S j,t < E (S j,t )] = Value declines
Monday, March 21, 16