Accounting and financial management in international business
Introduction
This is a two part topic which deals with the closely related subjects of accounting and financial management in the international firm. We will follow the convention of dealing first with accounting and then with finance. This is also the sequence used by Hill (2005) in your textbook in Chapters 19 and 20 respectively. The two subjects encompass a wide range of topics. You are not expected to absorb all of the detail, so concentrate on understanding accounting and finance from the perspective of a general manager. CEOs need to know what their accountants and financial controllers are doing without becoming immersed in the detail. We will follow the headings used by Hill (2005) and generally restrict the discussion so as not to wander too far from the textbook.
Part A is about accounting systems which vary considerably country-by-country. This presents problems for MNEs which have to report operations on a consolidated basis to conform to the system used by the parent company's country. Also, parent companies must account for foreign purchases and sales and report foreign operations on their own books. Tax systems differ country-by-country and MNEs want to avoid being taxed twice on profits made by subsidiaries and remitted to the home country.
Part B discusses the problems and opportunities faced by MNEs because they operate in a multicurrency world. The capital budgeting process is reviewed, with attention given to foreign exchange risk and political risk and also to opportunities for financing from non-domestic sources of funds. Short-term asset management is similarly covered, with emphasis on centralised international cash management. The choice of debt versus equity is considered, and some financial advantages available to the international firm are noted. Finally, Part B deals more comprehensively with foreign exchange risk management than does Chapter 6: The international monetary system of this unit.
Topics
The following is the outline of the topics covered in this chapter.
- 12.1 Part A: Accounting in international business
- 12.2 Country differences in accounting standards
- 12.3 National and international standards
- 12.4 Consolidation and currency translation
- 12.5 Accounting aspects of control systems
- 12.6 Changes in exchange rates
- 12.7 Transfer pricing
- 12.8 Summary: Part A
- 12.9 Part B: Financial management in international business
- 12.10 Financial management in MNEs
- 12.11 Investment decisions
- 12.12 Financing decisions
- 12.13 Financial structure
- 12.14 The objectives of global money management
- 12.15 Moving money across borders
- 12.16 Techniques for global money management
- 12.17 Managing foreign exchange risk
- 12.18 Transaction exposure
- 12.19 Developing policies for managing foreign exchange exposure
- 12.20 Summary: Part B
- 12.21 Integrative summary: Parts A and B
Learning outcomes
The objectives for this chapter have been carefully constructed to reflect the most significant concepts and ideas we are going to cover and to provide a focus for your work during the chapter. After completing the work you should be able to:
- explain why accounting practices and standards differ from country-to-country
- describe attempts to harmonise accounting practices in different countries
- explain the rationale behind consolidated accounts
- outline the accounting aspects of control systems, including the Lessarge-Lorange model and transfer pricing
- explain the differences between 'normal' capital budgeting and that of the international firm
- explain the concepts of political risk and economic risk and discuss methods of dealing with them
- describe the differences in the financial structures required because of the culture and tax regimes of different countries
- explain the techniques available for global money management.
