14 -1

CHAPTER
International
Issues in
Managerial
Accounting
 14 -2

Objectives
1. Explain the role
Afterofstudying
the management
this
accountant in the international
chapter, you should environment.
2. Identify the varying levels
be able to:of involvement
that firms can undertake in international
trade.
3. List the ways management accountants can
manage foreign currency risk.
4. Explain why multinational firms choose to
decentralize.
 14 -3

Objectives
5. Describe how environmental factors can
affect performance evaluation in the
multinational firm.
6. Discuss the role of transfer pricing in the
multinational firm.
7. Discuss ethical issues that affect firms
operating in the international environment.
 14 -4

Where does the

management accountant
fit into the global
business environment?
 14 -5

Business looks to the

management accountant
for international
financial and business
expertise.
 14 -6
Management Accounting in the
International Environment
Skills needed by
management accountants

 Politics
 Economics
 Marketing
 Management
 Information Systems
Technology
 14 -7
Multinational Corporation (MNC)

A multinational
corporation (MNC)
is one that “does
business in more
than one country in
such a volume that
its well-being and
growth rest in more
than one country.”
 14 -8

Importing and Exporting

Importing is the process

of bringing product in
from a foreign country.
Exporting is the process
of shipping product to a
foreign country.
 14 -9

Foreign Trade Zones

Foreign trade zones

are areas near a
customs port of entry
that are physically on
U.S. soil but
considered to be
outside U.S. Example:
Example:
San
New
commerce.
Antonio
Orleans
 14 -10

Example of the Advantages of Operating

a Plant in a Foreign Trade Zone

Roadrunner, Inc. operates a

petrochemical plant in a
foreign trade zone.
Wilycoyote, Inc. operates an
identical plant just outside
the foreign trade zone. Both
plants purchase $400,000 of
crude oil from Venezuela.
 14 -11

Example (continued)

Roadrunner Wilycoyote
Duty paid at purchase $ 0 $24,000
Carrying costs of duty 0 1,920
Duty paid at sale 16,800 0
Wilycoyote
pays
Totalduty at
duty-
therelated
point of
Roadrunner payspurchase (6%
carrying costs
duty at point of sale
of $400,000).
(0.12 x 8/12 x
because it is in a
$24,000)
foreign trade zone.
 14 -12

Example (continued)

Roadrunner Wilycoyote
Duty paid at purchase $ 0 $24,000
Carrying costs of duty 0 1,920
Duty paid at sale 16,800 0
Total duty and duty-
related costs $16,800 $25,920

Clearly the
advantage
approach
 14 -13

AIf the
company
laws ofmay
the choose
countrytopermit,
purchase
an
an
multinational
existing foreign
corporation
company,
can making
simply
setthe
uppurchased
a wholly owned
company subsidiary
a whollyor
branchowned
officesubsidiary.
in the country.
 14 -14

Outsourcing is the payment by

Outsourcing
a companyof fortechnical
a businessand
professional jobs is becoming
function formerly done in-
an important
house, issue
such as for cost-
payment for
conscious
legal needs toU.S. firms.
outside firms.
 14 -15

A joint venture is a type of

partnership in which
investors co-own the
enterprise. A special case
of joint venture
cooperation is the
maquiladora—a
manufacturing plant
located in Mexico which
processes imported
materials and reexports
them to the United States.
 14 -16

Foreign Currency Exchange

Kinds of risks:
 Currency risk management

 Transaction risk

 Economic risk

 Translation (accounting ) risk

 14 -17
A Transaction Risk Example
SuperTubs, Inc., a U.S. firm, sells its line of whirlpool
tubs to Bonbain, a French distributor. On January 15,
Bonbain orders 100 tubs at $1,000 per tub to be paid
with French francs on March 15. The exchange rate on
on January 15 is seven francs per dollar or 700,000
francs. Suppose that on March 15 the exchange rate is
7.1 francs per dollar. A $1,408 loss is experienced by
SuperTubs, Inc.
Receivable in dollars on Jan. 15 $100,000
Received in dollars on March 15
(700,000/7.1) 98,592
Exchange loss $ 1,408
 14 -18
A Transaction Risk Example
If the franc had strengthened against the dollar to a rate
of 6.9 francs per dollar, a $1,449 gain would occur:

Receivable in dollars on Jan. 15 $100,000

Received in dollars on March 15
(700,000/6.9) 101,449
Exchange gain $ 1,449
 14 -19

One way of insuring

against gains and losses
on foreign currency
exchanges is hedging.
 14 -20

Managing Economic Risk

Economic risk is the impact of
exchange rate fluctuations on the present
value of a firm’s future cash flows.
Example
A U.S. consumer can choose to purchase heavy
equipment from either Caterpillar (U.S.) or Komatsu
(Japan). A piece of equipment is $80,000 from either
maker. At an exchange rate of $1 equals 130 yens, the
price is set. Assume the dollar strengthens so the
exchange rate becomes $1 equals 140 yens. This
lowers Katmatsu’s price to $74,286.
 14 -21

Managing Translation Risk

Example
Multinational, Inc., has a foreign division, FD, which
has been experiencing eroding sales. Multinational
directs FD managers to increase marketing
expenditures over the following four quarters:
Quarter Expenditures in Local Currency
1 LC10,000 A 10%
2 LC11,000 increase
3 LC12,100 each
4 LC13,310 quarter
 14 -22

Managing Translation Risk

Example (continued)
Suppose that the dollar has strengthened against
the local currency and the quarterly exchange
rates of $1 for units of local currency are 1.00,
1.2, 1.35, and 1.50, respectively.
Quarter Expenditures in Local Currency
1 $10,000
2 9,167 It looks like FD
3 8,963 has decreased
expenditures.
4 8,873
 14 -23
Advantages of Decentralization
in the MNC
 The quality of information is better at the local
level.
 Local managers in the MNC are capable of a
more timely response in decision making.
 Social, legal, and language barriers are
minimized.
 Valuable training grounds for foreign
subsidiary managers.
 14 -24

Measuring Performance in the Multinational Firm

It is particularly difficult
to compare the
performance of a manager
of a division in one
country with the
performance of a manager
of a division in another
country.
 14 -25

Measuring Performance in the Multinational Firm

An example of misleading results:
Assets Revenues Net Income Margin Turnover ROI
Brazil $10 $6 $3 0.50 0.60 0.30
Canada 18 13 10 0.77 0.72 0.55
Spain 15 10 6 0.60 0.67 0.40
Analysis: On the basis of ROI, it appears that the manager
of the Canadian subsidiary did the best job, while the
manager of the Brazilian subsidiary did the worst job.
However, the inflation rate in Brazil was 100% for the
year. After adjusting the asset base for inflation, the ROI
would be 60% for the Brazilian manager.
 Environmental Factors Affecting 14 -26

Performance Evaluation in the MNC

Economic Factors:
Organization of central banking system
Economic stability
Existence of capital markets
Currency restrictions

Adapted from Wagdy M. Abdallah, “Change the Environment or Change the System,” Management
Accounting (October 1986): pp. 33-36.
 Environmental Factors Affecting 14 -27

Performance Evaluation in the MNC

Political and Legal Factors:
Quality, efficiency, and effectiveness of legal
structure
Effect of defense policy
Impact of foreign policy
Level of political unrest
Degree of governmental control of business
Adapted from Wagdy M. Abdallah, “Change the Environment or Change the System,” Management
Accounting (October 1986): pp. 33-36.
 Environmental Factors Affecting 14 -28

Performance Evaluation in the MNC

Educational Factors:
Literacy rate
Extent and degree of formal education
and training systems
Extent and degree of technical training
Extent and quality of management
development programs

Adapted from Wagdy M. Abdallah, “Change the Environment or Change the System,” Management
Accounting (October 1986): pp. 33-36.
 Environmental Factors Affecting 14 -29

Performance Evaluation in the MNC

Sociological Factors:
Social attitude toward industry and business
Cultural attitude toward authority and persons
in subordinate positions
Cultural attitude toward productivity and
achievement (work ethic)
Social attitude toward material gain
Cultural and racial diversity
Adapted from Wagdy M. Abdallah, “Change the Environment or Change the System,” Management
Accounting (October 1986): pp. 33-36.
 Income Taxes and
14 -30

Transfer Pricing
Action Tax Impact
Belgian subsidiary of parent 42% tax rate
company produces a component $100 revenue – $100
at a cost of $100 per unit. Title to cost = $0
the component is transferred to a Taxes paid = $0
reinvoicing center in Puerto Rico
at a transfer price of $100 per unit.
 Income Taxes and
14 -31

Transfer Pricing
Action Tax Impact
Reinvoicing center in Puerto Rico, 0% tax rate
also a subsidiary of parent company $200 revenue – $100
transfers title of component to U.S. cost = $100
subsidiary of parent company at a Taxes paid = $0
transfer price of $200 per unit.

Action Tax Impact

U.S. subsidiary sells a component 35% tax rate
to external company at $200 each. $200 revenue – $200
cost = $0
Taxes paid = $0
 14 -32

The IRS allows three pricing

methods that approximate
arm’s-length pricing (shown in
the order of preference):
 Comparable uncontrolled
price method
 Resale price method

 Cost-plus method
 14 -33

Questions to Ask Concerning Ethics

in the International Environment

Is the action right legally?

Is the action right morally?
 14 -34

Chapter Fourteen

The End
14 -35