International Accounting Issues and Multinational Finance Functions

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International Accounting Issues and Multinational Finance Functions Prepared by:Arhanti Shah Sona Bhagat Ankit Panchasara Jimi Shah Bhavin Bhavi n Yogi Yogi

 

Decision making 

CFO along with controller, chief accountant makes decision regarding company’s financial resources. 

 

 WH  WHAT CAN GO WRONG Ex: parmalat’ss  Ex: parmalat’ Used to show sells as profit



Off-balance-sheet



 

Role of controller Controller

Establishment of accoun accounting ting standards and principles

Preparation of financial f inancial statement for financial and external use

Evaluation Evaluatio n of operation

Hedging activities

Internal auditing

Cash flow f low management management

Tax planning pla nning

 Assistant in establishing and implementing corporate strategy 

 

 A  Acccounting for intern rnaational dif iffferences 

Form and the content of financial statements are different in different countries.

Example:

U.S.based companies: least liquid to most liquid Assets=liabilities+Shareholder’s equity Europe: most liquied to least liquied Fixed

assets+Current

assets-Current

liabilities=capital and reserves

liabilities-Noncurrent

 

Accounting Objectives 

To identify, record and interpret economic events.



FASB and IASB



Purpose of setting accounting objectives



Investment and credit decision





Assesment of cash flow prospects Evaluation of enterprice resources, claim and changes to resources

 

Users of IASB Investors



Employees



Lenders



Customers



The Public





Suppliers and other trade creditors Government and their agencies



Factors Affecting Affecting international accounting accoun ting practice

 

Cultural differences •

Secrecy-transparency/Optimism-conversation Matrix

 

Classi Classiffying Accounting Accounting Systems Systems

 

Differences in financial statements 

Language



Currency



Type of statements



GAAP

 

Internation International al stds & Global Convergence •

GAAP into line with IFRS issued by the IASB.



Factors leading to convergence : 1.

Investor orientation.

2.

Global integration of capital markets.

3.

MNE’s need for foreign capital.

4.

Regional political & economic harmonization.



The new IASC



IFRS

 

ransactions ons in Foreign Currencies Transacti •

Recording Transactions :



Foreign- currency receivables & payable give rise to gains & losses whenever the exchange rate changes.



Transaction gains & losses must be included in the income statement in the accounting period in which they arise.





Correct procedures for U.S. companies: The FASB requires that U.S. companies report foreign-currency transactions at the original spot exchange rate & the subsequent gains & losses on foreigncurrency receivables or payables be put on the income statement.

 

Translating foreign-currency Financial Statement •

Translation in U.S. is a two- step process:

1.

Companies recast foreign- currency financial statement into statement consistent with U.S. GAAP.

2.

Companies translate all foreign- currency amounts into int o U.S. dollars.



Translation Methods

1.

Two method : Current Rate Method

2.

Temporal Method



Disclosing Foreign- Exchange Gains & losses

 

Management Accounting Issues 

Performance Evaluation & control:



Performance Evaluation in the Budgeting Process



Forecast Rates



Hedging Strategies







Transfer Pricing & Performance evaluation. Balanced Scorecard Using the balanced scorecard helps mgt avoid using only one measure of performance.

 

  

The BSC – strategies giving rise to value creation from the following perspectives:

1.

Financial

2.

Customer

3. 4.

Internal business processes Learning & growth.

 

  Corporate Governance 1. External control Mechanism- the legal system 



Corporate governance practices worldwide are partly a function of the legal environment in the countries where companies operate. The Sarbanes- Oxley Act 2002 was passed in the U.S. to improve financial reporting & strengthen internal controls.

2. Internal control Mechanism

 

The Finance Function 

The corporate finance function acquires and allocates financial resources among the company’s activities and projects. Four key functions are:





Capital structure.



Long-term financing.



Capital budgeting.



Working capital management.

The CFO acquires financial resources and allocates them among the company’s activities and projects.

 

Structuree Capital Structur 

Capital structure of the company is the mix between long-term debt and equity



Leverage is the degree to which a firm funds the growth of  business by debt.



The amount of leverage used varies from country countr y to country.

 

Factors that Influence the Choice of Capital Structure 



Choice of capital structure depends on: 

tax rates



degree of development of local equity markets



creditor rights

Companies can use local and international debt markets to raise funds.

 

Global Capital Markets 

Two major sources of funds external to the MNE’s  normal operations are debt markets and equity markets.

 

Eurocurrencies 



A Eurocurrency is any currency banked outside its country of origin, but it is primarily dollars banked outside the United States Four majorgovernments sources of Eurocurrencies: Foreign or individuals who want to hold 







dollars outside the United States Multinational enterprises that have cash in excess of current needs European banks with foreign currency in excess of current needs Countries such as Germany, Japan, and Taiwan that have large balance-of-trade surpluses held as reserves

 

Types of international bonds 





Foreign bonds

Eurobonds Global bonds

 

Equity Securities and the Euro equity Market 

The three largest stock markets in the world are in New York, Tokyo, and London, with the U.S. markets controlling nearly half of the world’s stock market capitalization.



Euroequities are shares listed on stock exchanges in countries other than the home country of the issuing company

 

American Depositary Receipts (ADRs) 

Most foreign companies that list on the U.S. stock exchanges do so through American Depositary Receipts, which are financial documents that represent a share or part of a share of  stock in the foreign company



ADRs are easier to trade on the U.S. exchanges than are foreign shares

 

Offshore Financial Centers 

Offshore financing is the provision of financial services by banks and other agents to nonresidents.



Offshore financial centers are cities or countries that provide large amounts of funds in currencies other than their own.



A U.S. company can raise Eurodollar Eurodo llar in London.

 

Capital Budgeting in a Global Context 

Capital budgeting is the process whereby MNEs determine which projects and countries will receive capital investment funds.

 

Methods Of Capital Budgeting 

Capital budgeting techniques:   





Payback period. Net present value of a project. Internal rate of return.

MNEs need to determine free cash flows based on cash flow estimates and tax rates in different countries and an appropriate required rate of return adjusted for risk. Two ways to deal with the variations in future cash flows: determine several different scenarios or adjust the hurdle rate

 

Internal Sources of Funds 

Funds are working capital, or current assets minus current liabilities.



Sources of internal funds are: 

Loans.



Investments through equity capital.



Intercompany receivables and payables.



Dividends.

 

Funds (I): Internal Funds How the MNE Handles Its Funds

 

Global Cash Management 

Cash budgets and forecasts are essential in assessing a company’s  cash needs.



Dividends are a good source of intercompany transfers, but governments often restrict their free movement.



Multilateral netting is the process of coordinating cash inflows and outflows among subsidiaries so that only net cash is transferred, reducing transaction costs.



Netting

requires

sophisticated

relationships in different countries.

software

and

good

banking

 

Funds (II): Multilateral How the MNE Handles Its Funds Cash Flows

 

Funds (IV): How the MNE Handles Its Funds Multilateral Netting

 

Foreign-Exchange Risk Management 

Translation Tra nslation exposure arises because the dollar value of the exposed asset or liability changes as the exchange rate changes.



Transaction exposure arises because the receivable or payable changes in Transaction value as the exchange rate changes. 

Economic, or operating, exposure arises from effects of exchange-rate changes on: 

Future cash flows.



The sourcing of parts and components.



The location of investments.



The competitive position of the company in different markets.

 

Taxati axation on of Foreign Source Income  

Tax planning influences profitability and cash flow. flow. Taxation has a strong impact on several choices: Location of operations 









 

Choice of operating form, such as export or import, licensing agreement, overseas investment Legal form of the new enterprise, such as branch or subsidiary Possible facilities in tax-haven countries to raise capital and manage cash Method of financing, such as internal or external sourcing and debt or equity Capital budgeting decisions Method of setting transfer prices

 

Internationa Internationall Tax Tax Practices 

Problems with different countries’ tax practices arise from: 

Lack of familiarity with laws.



Loose enforcement.



With a value-added tax, each company pays a percentage of the



value added to a product at each stage of the business process. Corporate tax rates vary from country to country country..

 

to Corporate Approaches to Corporate Taxation Taxation 

In the separate entity approach, governments tax each taxable entity when it earns income.



An integrated system tries to avoid double taxation of corporate income through split tax rates or tax credits.

 

Taxing Branches And Subsidiaries Subsidiaries 

Foreign branch income (or loss) is directly included in the  parent’  parent’ss  taxable income.



Tax deferral means that income from a subsidiary is not taxed until it is remitted to the parent company as a dividend.



In a CFC, U.S. shareholders hold more than 50 percent of the voting stock.



Active income is derived from the direct conduct of a trade or business. Passive income (also called Subpart F income) usually is derived from operations in a tax-haven country count ry..

 

Transfer Prices Prices 

A transfer price is a price on goods g oods and services one member of  a corporate family sells to another another..



The OECD has set transfer pricing guidelines to eliminate the manipulation of prices and, therefore, taxes for MNEs.

 

Double Taxation and Tax Credit 

The IRS allows a tax credit for corporate income tax U.S. companies pay to another country. A tax credit is a dollar-fordollar reduction of tax liability and must coincide with the recognition of income.



The purpose of tax treaties is to prevent double taxation or to provide remedies when it occurs.

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