12.8 Summary: Part A
We began Part A by looking at the origins of accounting systems in various countries and noting that they differ because of a wide range of factors. Hill (2005) lists five factors, but in fact discusses more than five. Regardless of the number of factors, they are essentially based in history, politics, the level of development of the country and its economic ties with other countries. National differences have resulted in a general lack of comparability in financial reporting and the trend towards transnational financing and investment has exacerbated the problem. The most significant move towards the harmonisation of accounting standards has come from the International Accounting Standards Board (IASB), but this body has yet to achieve the desired result of uniform standards. There is an Australian Accounting Standards Board (AASB) with a charter similar to that of the IASB.
The financial interdependence of units of an MNE is recognised in consolidated financial statements which give both the corporation and investors a realistic view of the financial state of the company. It is important to recognise that only assets, liabilities, revenues and expenses generated with third parties are shown. Transactions between units of the MNE are not shown.
Foreign subsidiaries normally produce their financial statements in the currency of the country where they are located. When the accounts of the MNE are consolidated, these financial statements must be translated into the currency of the home country. The current rate translation method uses the exchange rate at the date of the balance sheet to translate results into the home currency. This method is incompatible with the historic cost principle.
Under the temporal method, asset values are translated into the home currency using the exchange rate that exists at the time the assets were purchased. A problem with this approach is that the MNE's balance sheet may not balance.
The annual budget is a major control mechanism in an MNE. A change in the exchange rate between the time a foreign subsidiary's budget is set and the time its performance is evaluated leads to distortions in the control process. This can be dealt with by using the Lessard-Lorange model which suggests the use of a projected spot exchange rate to translate budget figures and performance figures into the corporate currency.
Finally, we looked briefly at transfer prices and noted that they can distort one's view of a subsidiary's performance. Transfer prices are one element among many in a foreign subsidiary's operating environment over which managers have no control. It is therefore important to evaluate separately the performance of a subsidiary and the performance of its manager.
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