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��Chapter 13:�Strategic Accounting Issues in Multinational Corporations��

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Learning Objectives

Explain the role played by accounting in formulating multinational business strategy.
Demonstrate an understanding of multinational capital budgeting.
Describe the factors that influence strategy implementation within a multinational corporation.

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Learning Objectives

Discuss the role of accounting in implementing multinational business strategy.
Identify issues involved in the design and implementation of an effective performance evaluation system within a multinational corporation.
Explain the impact of cultural diversity on strategic accounting issues within a multinational corporation.

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Strategy

Large scale plans

Reflect future direction

Categories

Strategy formulation

Determining organizational goals
Strategies to achieve goals

Strategy implementation

Managerial efforts
Attain organizational goals

Performance evaluation

Extent of goals achieved

Accounting

Significant role

Strategy formulation
Implementation

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EXHIBIT 13.1 Strategy formulation

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Strategy Formulation

Analysis of information

Internal factors

Culture, skills and know-how

External Factors

Customer, market, and competitor
Regulatory, social, and political factors

Financial expressions

Firm strategy
Preparation of budgets

Capital budgeting

Important part of strategy formulation

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Budgeting

Primary contribution of accounting
Assists in strategy formulation
Information to managers

Short-term responsibilities
Long-term planning responsibilities

Provides future expectations
Future results can be judged

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Capital Budgeting

Key activity in selecting capital investments
Capital investments

Involve large amount of resources
Cost and benefit over large periods of time

Three steps

Project identification and definition,
Evaluation and selection
Monitoring and review

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Capital budgeting techniques

Four techniques

Payback period
Return on investment
Net present value
Internal rate of return

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Payback period

Length of time
Recoupment of initial investment
Knowledge required

Initial investment amount
Annual after-tax cash flows

Project accepted

Payback period within predetermined length

Primary weaknesses

Ignores time value of money
Ignores total profitability of project

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�Return on investment�

Average annual return
On initial investment
Equals

Average annual net income divided by
Initial investment

Project accepted if

Return on investment over predetermined rate

Primary weaknesses

Ignores time value of money
Ignores possible cash outlays subsequent to initial investment

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Net present value

Present value of net future cash flows less
The initial investment
Requires

Estimate of minimum rate of return

Used as discount rate

Project accepted if

Net present value is equal to or greater than zero

Primary weaknesses

Not used for comparing projects

Of different sizes

Biased toward large investments

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�Internal rate of return�

Discount rate

Causes net present value of future cash flows to equal
Initial investment

Results in zero net present value
Project accepted if

IRR more than desired rate of return

Primary weaknesses

Requires unrealistic reinvestment assumptions
Difficult manual calculation

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Multinational Capital Budgeting

Requires

Initial investment required
Estimated future cash flows
Discount rate for present values

Complicated factors

Risk associated with future cash flows

Political risk
Economic risk
Financial risk

Taxes, import duties
Dividend restrictions
Cash flow limitations imposed by governments

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Political Risk

Political events impact cash flows
Extreme form

Nationalization
Expropriation of assets

Changes in foreign exchange controls
Repatriation restrictions
Tax rules
Labor laws
Varies significantly from one country to another

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Economic Risk

Impact on cash flows

Host country economy changes
Inflation
Most significant risk

Affects local population’s purchasing power
Impacts business’s overall cost structure
Costs associated with

Manager time
Effort to respond to inflation

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Financial Risk

Impact on cash flows

Changes in currency values
Interest rates
Other financial factors

Foreign exchange risk

Important component of financial risk

Foreign exchange risk affects

Evaluation of project based on

Host country cash flows
Parent country cash flows

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Evaluation of foreign project

Factors considered

Project perspective

Taxes
Rate of inflation
Political risk

Parent company perspective

Form of cash remittance to parent company
Expected changes in exchange rate

Over project life

Political risk

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EXHIBIT 13.4� Framework for Strategy Implementation

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�Management control�

Planning

Effectively implements strategy
Coordinating organization activities
Communicating with organizational members
Information Evaluating
Action decision
Influencing organizational members

Change their behavior
Consistent with organization’s strategy

Important issue

Delegation of decision-making authority

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�Management control�

Factors influencing effective control system

Organizational structure
Strategic role assigned to subsidiaries

Forms of organizational structures

Ethnocentric

Assumes universal cultural background of firm

Polycentric

Host country culture is important and adopted

Geocentric

Synergy of ideas of different countries

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Operational Budgeting

Expresses long-term strategy within shorter time frames
Provides mechanisms to

Translate organizational goals in financial terms
Assign responsibilities
Assign scarce resources
Monitor actual performance
Targets to achieve

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Exhibit 13.6—Influences Affecting the Operating Environment of Subsidiaries in Foreign Countries

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Performance Evaluation

Major aspects for evaluating foreign operations

Performance evaluating measures
Classification of foreign operations

Cost
Profit
Investment center

Issues

Evaluation of the foreign operation
Evaluation of manager of operation

The profit measurement method

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Performance evaluation measures

Financial criteria

Measures based directly on financial statement data

Net profit
Return on investment
Comparison of budgeted to actual profit

Nonfinancial criteria

Measures not based directly on financial statements

Market share
Relationship with host country government
Labor turnover

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Performance evaluation

Balanced scorecard

Balanced consideration to

Financial
Nonfinancial measures

Four perspectives

Financial perspective
Customer perspectives
Internal business process perspective
Innovation and learning perspectives

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EXHIBIT 13.12—Basic Model of a Balanced Scorecard Performance System

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Responsibility centers

Foreign affiliate held accountable as

Cost centers

Produce output using available resources

Profit centers

Responsible for costs and revenues

Investment centers

Responsibilities of profit center plus
Responsibility for investment decisions
Return on investment (ROI)

Most common performance measure

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Separating managerial and unit performance

Separating performance evaluation

Managerial performance
Unit performance

Uncontrollable items

Local manager has no control
No permission to manage
Controlled by the parent
The host government
Controlled by others

Responsibility accounting

Managers not accountable

For uncontrollable items

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Uncontrollable items

Controlled by the parent company

Sales and cost
Determined by transfer pricing
Allocation of corporate expenses
Interest expense

Controlled by the host government

Foreign exchange spending restrictions
Price controls
Local content laws

Controlled by others

Labor strikes
Foreign exchange loss
Power outrages
War, riots, and terrorism

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Choice of currency in measuring profit

Profit measured in

Local currency

Subsidiary not paying parent currency dividends

Parent currency

Subsidiary paying parent currency dividends
Choice of a translation method

Whether translation adjustment included in profit

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Foreign Currency Translation

Translation for internal purposes

Financial accounting standards not followed

Factor influencing translation adjustment in the profit

Adjustment reflects the impact of change in rates on parent currency cash flows
Local manager has authority to hedge translation exposure

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�Choice of currency in operational budgeting�

Operational budgets

Include budget-to-actual comparisons

If actual compared to budget

In local currency

Functions of overall budget variance

Sales volume variance
Local currency price variances

In parent currency

Functions of overall budget variance

Change in exchange rates
Sales volume variance
Local currency price variances

Exchange rates

Actual at time of budget
Projected at time of budget
Actual at end of budget period

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EXHIBIT 13.17—Combinations for translation of budget and actual results

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Implementing performance evaluation

Success of system depends on

Integration of system and business strategy
Feedback and review
Comprehensive measures
Ownership and support throughout organization
Fair and achievable measures
Simple, clear, and understandable system

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Culture and management control

Objectives

Influence human behavior

People in different cultures

React differently to control systems
Japan more collectivist society than the United States
Culture affects
Management style
Capital budgeting decisions

Short vs. long payback

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