PowerPoint Presentation by

Gail B. Wright
Professor Emeritus of Accounting
Bryant University

Copyright 2007 Thomson South-Western, a part of The

Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.

MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN

18 INTERNATIONAL ISSUES IN
ACCOUNTING
1MANAGEMENT
INTRODUCTION

LEARNING
OBJECTIVES
LEARNING
OBJECTIVES
LEARNING GOALS

After studying this

chapter, you should
be able to:

LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Explain the role of the management
accountant in the international environment.
2. Identify the varying levels 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.
continued

LEARNING
LEARNING OBJECTIVES
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.
Click the button to skip
Questions to Think About

QUESTIONS TO THINK ABOUT:

Milbourne Shutter Company

What are the business issues to

consider in deciding whether to
trade overseas?

QUESTIONS TO THINK ABOUT:

Milbourne Shutter Company

If exchange rates can either

increase or decrease, are the risks
equal? Would Jeff be more
concerned about one or the other?
Why or why not?

QUESTIONS TO THINK ABOUT:

Milbourne Shutter Company

When considering each

international order on a case-bycase basis, what might influence
his decisions?

QUESTIONS TO THINK ABOUT:

Milbourne Shutter Company

Are there differences in

considerations for shipping
internationally & shipping to
another state? Or trade with France
versus trade with Russia or Iran?
8

LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Explain the role of

the management
accountant in the
international
environment.

LO 1

MANAGEMENT ACCOUNTING
In
Inan
aninternational
internationalenvironment
environmentrequires
requiresaa
shift
shiftin
inperspective.
perspective.There
Thereare:
are:

Implications
Implicationsof
offoreign
foreigncurrency
currencyexchange
exchange

Differences
Differencesinincredit
creditpractices
practices

Differences
Differencesinincultural,
cultural,legal,
legal,political,
political,and
and
economic
economicenvironments
environments

10

LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Identify the varying

levels of involvement
that firms can
undertake in
international trade.

11

LO 2

MULTINATIONAL CORPORATION
(MNC)
MNC does business in more
than one country in such a
volume that its well-being &
growth rest in more than one
country.1

Hansen & Mowen, 2007, p. 808.

12

LO 2

INTERNATIONAL TRADE
Levels of involvement
Importing & exporting
Concern:
Tariffs & foreign trade zones
Treaties

Wholly owned subsidiaries

Joint ventures

13

LO 2

TARRIFF:
TARRIFF: Definition
Definition

Is a tax on imported or
exported goods.

14

LO 2

FOREIGN TRADE ZONES

Are
Areset
setup
upby
bygovernment
governmentininUS
USnear
nearports
portsof
of
entry
entrybut
butconsidered
consideredoutside
outsideUS
UScommerce.
commerce.

Goods
Goodsimported
importedinto
intoforeign
foreigntrade
tradezones
zonesare
areduty
duty
free
free

Company
Companycan
canpostpone
postponepayments
paymentsofofduty
duty

No
Noduty
dutyon
ondefective
defectivematerials
materials

Imported
Importedgoods
goodscan
canbe
bemodified
modifiedtotomeet
meetUS
US
regulations
regulations

High
Hightariff
tariffcomponents
componentscan
canbe
beassembled
assembledinto
into
lower-tariff
lower-tarifffinished
finishedproducts
products
15

LO 2

ROADRUNNER
ROADRUNNER VS.
VS.
WILYCOYOTE.:
WILYCOYOTE.: Background
Background
Roadrunner
Roadrunneroperates
operatesaapetrochemical
petrochemicalplant
plant
that
thatimports
importsvolatile
volatilematerials
materialsin
inaaforeign
foreign
trade
tradezone
zonewhile
whileaarival,
rival,Wilycoyote,
Wilycoyote,
operates
operatesaasimilar
similarplant
plantjust
justoutside
outsidethe
the
foreign
foreigntrade
tradezone.
zone.The
Thetwo
twocompanies
companies
pay
payduty
dutyon
onimports
importsdifferently.
differently.

16

LO 2

DUTY ANALYSIS
Roadrunner Wilycoyote
Duty paid at purchase
Carrying costs of duty
Duty paid at sale
Total duty, duty-related costs

$ 24,000

1,920

16,800

$ 16,800

$ 25,920

Duty paid on sale by

Roadrunner is significantly
lower than duties paid by
Wilycoyote on import.
17

LO 2

TARIFFS & TREATIES

Can
Canbe
bemanaged
managedby
bytreaties
treatiesamong
among
countries.
countries.NAFTA
NAFTAallows
allowsreduced
reducedtariffs
tariffs
on
ongoods
goodsimported
importedamong
amongCanada,
Canada,US,
US,
and
andMexico.
Mexico.

18

WHOLLY OWNED
SUBSIDIARIES

LO 2

Can
Canbe
bepurchased
purchasedcompanies
companiesor
or
companies
companiesset
setup
upas
assubsidiaries
subsidiariesor
or
branch
branchoffices
officesin
inforeign
foreigncompanies.
companies.

19

LO 2

OUTSOURCING:
OUTSOURCING: Definition
Definition

Is payment by a company for

business functions formerly
done in-house.

20

LO 2

JOINT
JOINT VENTURE:
VENTURE: Definition
Definition

Is a type of partnership in which

investors co-own the enterprise.
A special example is a
maquiladora, a manufacturing
plant in Mexico.
21

LEARNING
LEARNING OBJECTIVE
OBJECTIVE

List the ways

management
accountants can
manage foreign
currency risk.

22

LO 3

FOREIGN
FOREIGN CURRENCY
CURRENCY RISK:
RISK:
Definition
Definition

Refers to the companys

management of its transaction,
economic, & translation risks
due to exchange rate
fluctuations.

23

LO 3

MANAGING CURRENCY RISK

Transaction risk
Possibility that future cash transactions will be affected by
exchange rate fluctuations

Economic risk
Possibility that a firms present value of future cash flows
will be affected by exchange rate fluctuations

Translation (accounting) risk

Degree to which firms financial statements are exposed to
exchange rate fluctuations
24

LO 3

SPOT RATES

EXHIBIT 18-1

Exchange rate on
spot market for US
dollars.

25

LO 3

MANAGING TRANSACTION RISK

Companies face risk of currency appreciation
(depreciation). They can manage the effects
of fluctuating exchange rates on cash
transactions by using
Spot (immediate) rate
Hedging
Forward exchange contract for specified amount at
specified rate on specified future date.
26

LO 3

TRANSACTION
TRANSACTION GAINS,
GAINS, LOSSES:
LOSSES:
Background
Background

SuperTubs,
SuperTubs,Inc.
Inc.sells
sellswhirlpool
whirlpooltubs
tubsatathome
home
and
andin
inforeign
foreignmarkets.
markets.SuperTubs
SuperTubssold
sold
100
100tubs
tubson
on1/15
1/15for
for$1,000
$1,000each
eachto
tobe
be
paid
paid3/15.
3/15.The
Theexchange
exchangerate
rateon
on1/15
1/15isis..
82
82euros
eurosper
per$1.
$1.What
Whatisisthe
thegain/loss
gain/losson
on
3/15
3/15ififthe
theexchange
exchangerate
rateisis.84
.84euros
euroson
on
3/15?
3/15?IfIfthe
theexchange
exchangerate
rateisis.80
.80euros?
euros?
27

LO 3

EXCHANGE RATE LOSS

Receivable in dollars 1/15

$ 100,000

Receivable in dollars 3/15

97,619

Exchange loss

2,381

The exchange rate rose from .82

euros to .84 euros per $1,
providing an exchange loss.

28

LO 3

EXCHANGE RATE GAIN

Receivable in dollars 1/15

$ 100,000

Receivable in dollars 3/15

102,500

Exchange gain

2,500

The exchange rate dropped

from .82 euros to .80 euros per
$1, providing an exchange gain.

29

LO 3

HEDGING
HEDGING CURRENCY
CURRENCY
FLUCTUATIONS:
FLUCTUATIONS: Background
Background
SuperTubs,
SuperTubs,Inc.
Inc.engages
engagesin
inhedging
hedgingto
tooffset
offset
aapossible
possibleloss
losson
onexchange
exchangerate
rate
fluctuations.
fluctuations. On
On1/15,
1/15,SuperTubs
SuperTubs
purchased
purchasedaacontract
contractto
toexchange
exchange82,000
82,000
euros
eurosinto
intodollars
dollarsatataaforward
forwardrate
rateof
of.825
.825
euros.
euros.On
On3/15,
3/15,SuperTubs
SuperTubspays
pays82,000
82,000
euros
eurosto
tothe
thedealer
dealerand
andreceives
receives$99,394.
$99,394.
30

LO 3

HEDGING
Receivable in dollars 1/15

$ 100,000

Receivable in dollars 3/15

99,394

Premium expense

606

The cost of hedging against

currency fluctuations is less
than the loss from doing
nothing.
31

LO 3

MANAGING ECONOMIC RISK

Companies must manage risk to the present
value of future cash flows due to exchange
rate fluctuations. The management
accountant must:
Understand the companys position in a global
economy
Provide financial structure and communication
for the firm
Encourage use of hedging
32

LO 3

MANAGING TRANSLATION RISK

Companies must manage risk presented when
the effects of financial transactions are not
the same in different currencies.
Multinational, Inc., has a foreign division
(FD) with eroding sales. Management
directs FD to increase marketing
expenditures, which FD does by increasing
the expenditures by 10% per quarter.
continued

33

LO 3

MARKETING EXPENDITURES
Quarter

Expenditures in Local Currency

LC 10,000

LC 11,000

LC 12,100

LC 13,310
Expenditures in local currency
were increased by 10% per
quarter over the year.

34

LO 3

MARKETING EXPENDITURES
Quarter

Expenditures in Dollars

$ 10,000

9,167

8,963

8,873
Expenditures in dollars were
decreasing each quarter over
the year, a fact hidden in
currency translation.
35

LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Explain why
multinational firms
choose to
decentralize.

36

LO 4

ADVANTAGES OF
DECENTRALIZATION
Local level information is higher quality
Local managers can make a more timely
response in decision making
Less likely to misinterpret instructions at local
level due to language differences

37

LO 4

How do MNCs address

language differences?

MNCs 1) push decision making

down to local manager, and 2)
incorporate technology that
overrides language barriers.

38

LO 4

How do MNCs address

decentralization?

MNCs create different divisions

by 1) geographic lines, 2)
product lines, and 3) functional
management lines.

39

LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Describe how
environmental factors
can affect performance
evaluation in the
multinational firm.

40

LO 5

EVALUATING PERFORMANCE
Managers should be evaluated only on those
factors that the manager has control over.
Evaluations based on revenues or costs are
not affected by currency fluctuations.
Comparative evaluations are difficult
because of cultural differences between
countries.

41

LO 5

ENVIRONMENTAL FACTORS

EXHIBIT 18-2

Many environmental
factors affect
performance.

42

LO 5

What measures are best for

performance evaluation in an
international setting?

Multiple measures are the best

approach. Include EVA
(economic value added) or ROI
for short term measures.

43

LO 5

OTHER PERFORMANCE
MEASURES
To
Todiscourage
discouragemyopic
myopicbehavior
behaviorfrom
fromrelying
relying
on
onshort
shortterm
termperformance
performancemeasures,
measures,
include
include

Market
Marketshare
share

Customer
Customercomplaints
complaints

Personnel
Personnelturnover
turnoverratios
ratios

Personnel
Personneldevelopment
development
44

LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Discuss the role of

transfer pricing in the
multinational firm.

45

LO 6

How can transfer pricing

affect the taxes a company
pays?

Transfer pricing can shift

revenues and costs between
high & low tax countries.

46

LO6

USING TRANSFER PRICING

Carefully crafted
transfer pricing can
reduce corporate
taxes.

EXHIBIT 18-3

47

LO 6

What methods can be used

for transfer pricing?

Transfer pricing methods

include 1) comparable
uncontrolled price, 2) resale
price, and 3) cost-plus price.

48

LEARNING
LEARNING OBJECTIVE
OBJECTIVE

Discuss ethical issues

that affect firms
operating in the
international
environment.

49

LO 7

GLOBAL ETHICS: Richard J. Mahoney,

CEO Monsanto

. . . we continually face the problem of

different cultures & different cultural
expectations. A service fee in 1 country is
a bribe in another. Environmental laws
can be extraordinarily strict in a country
but not enforced-& your neighbors laugh
at you for obeying the laws.2
2

Hansen & Mowen, 2007, p. 826

50

CHAPTER 18

THE
THE END
END

51