STRATEGIC ACCOUNTING ISSUES IN MNC’S
MULTINATIONAL CORPORATION (MNC’S) �
A multinational corporation is an organisation that owns or controls productions of goods or services in one or more countries other than the home country.
Thus, a corporation that has its facilities and other assets in at least one country other than its home country is a multinational corporation. Such companies have offices and/or factories in different countries and usually have a centralised head office where they co-ordinate global management.
All MNC’s that conduct strategic planning go through a three step process:
Strategy Formulation
(it involves determining organisational goals and strategies to achieve those goals.)
Strategy Implementation
(it involves managerial efforts to influence employees to attain organisational goals.)
Strategy Control
(managerial influence is also referred to as management control.)
Every organisation that plans to expand and grow worldwide would need to carry out strategic planning to determine:
So basically there are 3 steps that an organisation must consider and go through to carry out an effective strategic plan.
STRATEGY FORMULATION
For an MNC, strategy formulation identifies environmental and internal strengths to establish its goals and the strategic plan that will lead to the achievement of these goals. In strategy formulation , managers develop, refine and agree on which markets to enter to exist and how to best compete in each.
External Environmental Analysis
Internal Resource Analysis
OPPORTUNITIES AND
THREATS
STRENGHTS AND WEAKNESSESS
Fit internal competencies with external opportunities
STRATEGY FORMULATION
A strategy indicates the general direction in which a firm plans to move to attain its goals.
The strategy of any business organisation, whether purely domestic or multinational, are determined by matching two key ingredients…
Available opportunities
Core competencies
ACCOUNTING AND STRATEGY FORMULATION
Internal factors relate to the identification of core competencies of a firm focusing on strengths and weaknesses with regard to the expertise available within the firm in the areas of technology, manufacturing and distribution.
External factors relate to the identification of the opportunities available to the firm. It also includes the threats facing the firm in the areas of competitors, customers, suppliers, regulatory bodies etc.
Accounting provides the skills necessary to quantify in financial terms the factors that influence the strategy formulation- STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS, and to develop projections of costs and benefits as financial expressions of strategy.
For example: Organisational goals are often expressed in financial terms such as, ” to achieve a particular level of return on investment.”
CAPITAL BUDGETING TECHNIQUES | DEFINITION | ADVANTAGES | DISADVANTAGES |
Payback Period | Number of years to recover initial investment | Simple to use and understand | Ignores timing and time value of money Ignores cash flows beyond payback period |
Return on investment (ROI) | Rate of average annual net income to initial investment or average investment | Data readily available and consistent with other financial measures | Ignores timing and time value of money Uses accounting numbers rather than cash flows |
Net present value (NPV) | Difference between the initial investment and the present value of subsequent net cash inflows discounted at a given interest rate | Considers time value of money Uses realistic discount rate for reinvestment | Not meaningful for comparing projects requiring different amounts of investments |
Internal rate of return(IRR) | Discount rate that makes the initial investment equal to the present value of subsequent cash inflows | Considers time value of money Easy for comparing projects with diff. amounts of inv. | Complex to compute and assumption on reinvestment rate of return could be unrealistic |
ACCOUNTING ISSUES IN STRATEGY FORMULATION
(NET PRESENT VALUE = Present value of estimated future cash inflows – Initial Investment)
POLITICAL RISK
ECONOMIC RISK
FINANCIAL RISK
2. Preferences for using particular capital budgeting techniques vary across countries due to cultural reasons.
Due to cultural differences across countries, corporate managers may have to tailor the manner in which strategy is implemented in a specific country in order to achieve the desired results.
For example: a management control tool such as standard costing that assumes that the responsibility for specific tasks lies with the individual who is traceable may not be effective in a cultural context such as Japan where a group , rather than an individual , is assigned responsibilities.
3. Both NPV and IRR are discounted cash flows techniques (recognising time value of money) used for evaluating capital investment proposals.
In other words, the NPV method indicates whether or not a particular proposed investment is capable of generating a desired rate of return, and IRR method indicates the exact return that can be expected from a proposed investment.
The NPV method allows the use of a realistic discount rate for reinvestment, whereas the IRR method may not.
The IRR method facilitates comparison of projects requiring different amount of investments, whereas the NPV method is not helpful in comparing projects requiring different amount of investments.
STRATEGY IMPLEMENTATION AND CONTROL
Strategy implementation and control provides an additional source of feed-forward information. Implementation and control is designed to access whether the overall strategy should be changed in light of unfolding events and results associated with incremental steps and actions that implements the overall strategy.
Local Issues; factors influencing the choice include:
Factors to be considered in strategy implementation and control are:
Considerations in selecting a country:
Production:
MNC’s should decide to work in countries that have ample supply of resources necessary in the production of its product or required to provide its intended services.
Finance:
The main issue involved in borrowing funds from international money markets is the revaluation of currencies.
ACCOUNTING ISSUES IN STRATEGY IMPLEMENTATION AND CONTROL
A potential problem for MNC’s is the tendency for headquarters to implement financial control systems, often designed for home country operations and extend them to foreign subsidiaries.
CONCLUSION