MANAGEMENT ACCOUNTING

Don R. Hansen

Maryanne M. Mowen

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 Chapter Fourteen

International Issues
in Management
Accounting

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 Learning Objectives

 Explain the role of the management accountant in

the international environment.
 Discuss the varying levels of involvement that firms
can undertake in international trade.
 Explain the ways management accountants can
manage foreign currency risk.
 Explain why multinational firms choose to
decentralize.

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 Learning Objectives (continued)

 Explain how environmental factors can affect

performance evaluation in the multinational firm.
 Discuss the role of transfer pricing in the
multinational firm.
 Discuss ethical issues that affect firms operating in
the international environment.

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Management Accounting in the
International Environment

 Politics
 Economics
 Marketing
 Management
 Information Systems Technology

Skills needed by
Management Accountant

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 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.”

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 Levels of Involvement in
International Trade
Emerging Role of the Multinational Corporation (MNC)

 Importing

 Exporting

 Foreign Trade Zones

 Wholly Owned Subsidiaries

 Joint Ventures
Trade treaties on tariffs are becoming increasingly important.

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 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.

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 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. commerce.

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 Foreign Currency Exchange

Kinds of Risks

 Currency risk management

 Transaction risk

 Economic risk

 Translation (accounting ) risk

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 A Transaction Risk Example
Situation: Assume a U.S. firm sells products to a French distributor.
On January 1 the French distributor orders 100 units of the product for
$1,000 per unit to be delivered immediately and paid in French francs
on March 15. The exchange rate at the time of sale was 5 francs per
dollar. On March 15, the exchange rate was 5.1 francs per dollar.

Impact of transaction risk:

Receivable in dollars 1/15 $100,000
Received in dollars on 3/15 98,039
Exchange loss $ 1,961
=======
The purchase of a forward contract can act as a hedge against
transaction risk.

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 An Economic Risk Example

Situation: Suppose that U.S. consumers can purchase heavy

equipment from Japanese and U.S. manufacturers for
$50,000. If the purchase is made from Japanese
manufacturers at an exchange rate of 105 yen per dollar, the
purchase price is set at 5,250,000 yen. If the value of the
dollar weakens against the yen to 100 yen to the dollar, the
cost of the same Japanese equipment becomes $52,250 for the
U.S. customer. The Japanese Company is less competitive
without a change in its cost structure.

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 A Translation Risk Example

Situation: Suppose you are a division manager in Mexico.

Your division earned 320,000 pesos. This up from 200,000
pesos the year before, a hefty 60 percent increase. Now
suppose the income is translated into dollars. If the exchange
rate last year was 1.5 pesos per dollar and the exchange rate
this year is 3 pesos per dollar, your net income translates into
$133,333 net income last year and $106,667 this year.

This translation results in a 20 percent decrease in net income.

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 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.
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 Environmental Factors Affecting
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.
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 Environmental Factors Affecting
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.
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 Environmental Factors Affecting
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.
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 Environmental Factors Affecting
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.
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 Measuring Performance
in the MNC

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.

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 Income Taxes and Transfer Pricing
Action Tax Impact

Belgian subsidiary of parent company 42% tax rate

produces a component at a cost of $100 $0 income
per unit. Title to component is transferred Taxes paid = $0
to a Puerto Rico division at a transfer
price of $100.

Reinvoices to U.S. subsidiary at a $200 0% tax rate

transfer price $100 income
Taxes paid = $0

U.S. subsidiary sells unit to external 35% tax rate

company for $200 each. $0 income
Taxes paid = $0 PPT 14 -20
Acceptable Transfer Pricing Methods

Subject to IRS Regulations:

 Comparable Uncontrolled Price Method

 Resale Price Method

 Cost-Plus Method

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End of Chapter 14

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