Discussion questions
Chapter 1
Page 30
1. Chances are you will someday work for a MNE. What accounting skills do you think you will need to succeed in an international environment?
● The skill of developing consolidated financial statements and segment reporting ● The skill of analyzing international financial statement and international
accounting differences
● The knowledge of accounting for foreign currency and price changes
● The skill of managing foreign exchange exposure
● The skill of international budgeting and performance evaluation
● The skill of international auditing
● The skill of international taxation
Chapter 2
Page 45
2. What is accounting values?
● Professionalism versus statutory control
● Uniformity versus flexibility
● Conservatism versus optimism
● Secrecy versus transparency
Page 55
3. Why is the classification of accounting systems likely to be useful?
● It helps us describe and compare international accounting systems in a way that
will promote improved understanding of the complex realities of accounting practice
● It helps policymakers assess the prospects and problems of international
harmonization
● The education of accountants and auditors who operate internationally would be
facilitated by an appropriate classification system
● Such a system would promote a better understanding of and solution to
problems involving the establishment of appropriate accounting and control systems for MNEs
Chapter 5
Page 112
4. What are the following groups concerned about when looking at foreign financial statements?
● Banks/creditors:
Corporate information relating to financial position, performance, and future prospects, particularly the security of loans advanced
● Investors:
• Information relating to the performance and future prospects of the
worldwide operations of the MNE group and, in particular, geographical and line-of-business segmentation
● Industry analysts:
● Managers:
5. Should international management of international companies be concerned about the international differences in accounting methods? Why or why not? If yes, which differences are especially important to management?
● International management of international companies should be concerned
about the international differences in accounting methods
● Because international accounting differences impact the assessment of earning
and future cash flows and their associated risks and uncertainty. These assessments are important to corporations concerned with FDI, which involves the valuation of potential acquisitions and participating interests/joint ventures or the raising of capital of the listing/trading of stocks on foreign stock exchanges ● Important difference to management:
• Measurement basis: property, plant and equipment, inventories
• Depreciation accounting
• Construction contracts
• Research and development costs
• Borrowing costs of assets
• Exchange rates for income statement translation
• Retirement benefits
• Deferred taxation
• Business combinations
• Goodwill
• Intangibles
6. What is the advantage of seeking funding in the international market?
● Spread risk in a wider rage
● Make full use of the financial markets in different countries
● Can use international trade finance and other special financing way
● Easy access to international capital markets
● Reduce financing cost
7. If accounting principles around the world are harmonized, will this necessarily eliminate the diversity of earnings measurements practices?
● It will not. Because the factors contributing to the difference of accounting principles still exist and can’t be eliminated in a short time, such as the economic environment, Political and legal system, culture etc. •
8. How does the conservatism index relate to risk? In other words, does a more conservative country inherently have less risk?
Chapter 6
Page 146
9. What is meant by corporate transparency? Is it sufficient to disclose financial information?
● Corporate transparency can be defined as the widespread availability of relevant,
reliable information about the period performance, financial position, investment opportunities, governance, value, and risk of publicly traded firms. ● It is not sufficient to disclose financial information. Because we can only analyze
the financial status of a corporate, such as liquidity and capital resources, asset valuations and inflation.
● Sufficient disclosure should also include strategic and nonfinancial information.
Strategic information shows us the strategy and prospect of a corporate. Nonfinancial information, which is relevant to human resources, social responsibility and many other aspects, reflects the overall performance of a corporate.
10. Explain the incentives that might encourage management to disclose information.
● First, management provides information in respond to regulation.
● Second, management provides information voluntarily because it perceives it to
be in its own interests and those of the corporation to respond to the information demands of users and participant groups.
11. What are the likely costs to MNEs of making additional voluntary disclosures? ● Direct cost of disclosure is made up of
• The value of resources used in gathering and processing the information • The cost of auditing and communicating the information
● Indirect costs include
• Competitive disadvantage
• Costs of government interference
12. In which countries are stock exchange disclosure regulations most stringent? Less stringent? What are the reasons for this?
● Most stringent: U.S., U.K.
● Less stringent: Germany, Swizerland
●
13. Discuss the kinds of information you would like to see in the corporate review, the operations review, and the financial review sections of an MNEs directors ’ report.
Chapter 7
Page 173
13. The IASB’
s governance structure.
Chapter 8
Page 218
14. Why has accounting for goodwill become such a significant problem internationally?
● Goodwill incorporates the value of future earnings, and it relates to the valuation
of the business as a whole. Accordingly, it is currently a matter of considerable controversy as to whether goodwill should be treated as an asset for accounting purposes and, if so, whether or not it should be amortized against future earnings.
● This is an important issue because profits are used as a significant indicator of
business performance. Moreover, if assets are indicators of financial strength, then the question arises whether the “value ” of goodwill is relevant in contrast to the traditional emphasis on the existence and cost of tangible assets.
15. While the trend among MNEs around the world is to prepare consolidated financial statements, it has been suggested by experts that such statements may hide more than they reveal. Do you agree?
Chapter 9
Page 242
16. How is segment information likely to help investors in MNEs?
● Segment information is likely to help investors by allowing them to combine
company-specific information with external information, thus allowing for a more accurate assessment of both the risks involved and the potential for future growth.
● In addition, investors can gain an idea of the success of past operations by
comparing them with the performance of similar operations.
17. Discuss the likely benefits of segment reporting, with particular reference to the results of predictive ability and stock market research.
● Results of studies of predictive ability have shown that both LOB and
geographical segmental data are more useful than consolidated data for the prediction of earnings.
● Stock market research relating to risk management suggests that disclosure of
LOB and geographical segment data results in a decrease in a company’s riskiness as perceived by investors.
18. Identify the likely costs of segment reporting.
● The cost of compiling, processing, and disseminating information.
● The cost of disseminating information that is likely to benefit existing or potential
competitors
19. Explain the reasons behind using organizational structures as a basis for segment identification.
● It should normally provide the best evidence of an enterprise ’s predominant
source of risks and returns.
● This will determine whether the “primary ” segment reporting format will be
business segments or geographical segments, with a higher level of disclosure relative to the secondary reporting format.
Chapter 10
Page 276
20. XYZ prefers to translate the result of its Singapore subsidiary into dollars using the current rate method. What is the advantage to XYZ of using the current rate method? As its auditor, what do you think of its decision? If its decision is wrong and it should be using the temporal method, is it possible for XYZ to change?
Chapter 12
Page 335
21. Under what conditions should an MNE adopt a multi-domestic strategy? How about a global strategy or a transnational strategy?
Multi-domestic strategic companies
● Have products that differ from country market to country market
● High transportation costs
● Economies of scale may be too modest
● R&D closely tied to a specific market
● Government barriers to trade are too high
● Distribution systems are fragmented and impenetrable
Global strategic companies
● Benefits gained from worldwide volume exceed costs of serving that volume ● Usually more centralized than multi-domestic strategic companies
● See example at chapter end – Proctor and Gamble and Unilever
Transnational strategy
● 3 Global Imperatives
• Forces for global integration – the need for efficiency
• Forces for local differentiation – the need for responsiveness
• Forces for worldwide innovation – the need for learning
● Companies must deal with all 3 simultaneously
● Companies should use a transnational strategy
• Corporate assets are dispersed, interdependent, and specialized
22. The implication from the discussion in this chapter is that as a company becomes more global, it concentrates more on the informal and subtle mechanisms for controlling global operations than it does the structural and formal mechanisms. Why is this so? Do you think structural and formal mechanisms are becoming obsolete? Discuss your reasons.
23. Explain how lateral relations, informal communications, and organizational culture act as informal control mechanisms.
Lateral relations
● Task forces and meetings help throughout the formal structure to accomplish
corporate objectives
Informal communication
● Involves the network of personal contacts that one develops over time in the
organization
Organizational culture
● The outcome of the process of socializing individuals within a firm and across
national boundaries, which allows things to be done by different people in similar or consistent ways
Chapter 13
Page 353
24. The unbiased forward rate theory.
25. Types of hedging exposure.
● Transaction Exposure
• When a company engages in foreign currency transactions, a foreign
exchange risk is incurred
● Translation or Accounting Exposure
• Accounting exposure arises when a company translates its financial
statements from one currency to another for consolidation purposes
● Economic (Operating) Exposure
• Economic exposure is the potential for change in expected cash flows
Page 372
26. What are the major differences between a forward contract and a futures contract and between a forward contract and an options contract.
● The major differences between a forward contract and a futures contract
• A futures contract is traded on an exchange, not OTC
• A forward contract is tailored to the amount and time frame that the
company needs, whereas a futures contract is for a specific amount and specific maturity date
• The future contract is less valuable to a company than a forward contract • May be useful to speculators and small companies
• Contract months are March, June, September, December
• Less flexible than forward contracts
● The major differences between a forward contract and an options contract
• An option is the right but not the obligation to trade foreign currency at a
given exchange rate on or before a given date in the future
• An option can be traded on an exchange or with a financial intermediary • There are two parties to an option, the writer of the option and the holder
of the option. Holder determines whether or not the option will be
exercised
Chapter 14
Page 410
27. How can management accounting play a role in the strategic planning process? ● Identify the criteria for performance
● Monitor achievement against these criteria
28. What does EVA measure? How is it different from ROI? In your own words, explain why a positive EVA increases shareholder value.
● EVA = After-tax profit – Total cost of capital
● Measure of the total value added or depleted from shareholder value in one period
● Many companies make profits when calculating the profits in a traditional way such as
measuring by ROI. However, shareholder value is actually deleted in many cases, because the profit is lower than the total cost of capital. When profit is measure by EVA, it is defined by shareholder. For example, if shareholders hope the Return on investment to be 10%, they will only consider making money when the after-tax profit is greater than total cost of capital. Therefore, a positive EVA increases shareholder value because its sustainable growth will increase the market value of the company.
29. How can the Balanced Scorecard(BSC) help MNEs establish a set of adequate performance measurement criteria for the entire company, its subsidiaries, and subsidiary managers?
● Helps managers avoid using only one performance measure
● Forces managers to link financial measures with the non-financial factors that drive them
● Ensures that subs are evaluated based on a coherent set of performance bases
Exercises
Chapter 8
Page 219
3. Simple Consolidation Problem.
ASSETS
Cash 100
Accounts Receivable 350
Inventory 250
Plant and Equipment 1400
Investment in Marit 88 80% 10 50 20 150 - 110 395 270 1550 - (400 – 5)
Totals Assets 2188 230 2325
LIABILITIES 1320 120 1435 (1440 – 5)
Minority Interest 22 (110 x 20%)
EQUITY 868 110 868 Same as parent equity
TOTAL LIABILITIES
AND EQUITY 2188 230 2325
===================================================
INCOME
Sales 1500 400 1900
Income from Sub1 64 -
EXPENSES 750 320 1070
Minority Interest Income - - 16 (80 x 20%) Net Income 814 80 814 Same as parent NI ===================================================
Chapter 9
13.
Ch 10
1. Exchange Rate Relationships. Below are the exchange rates between the U.S.
dollar and five different currencies. The rates are quoted in terms of the number of units of the foreign currency to the dollar.
Euro .79670 .73310
British pound .56250 .51920
Swiss franc 1.2423 1.1318
Chinese yuan 8.2867 8.2865
Brazilian real 2.9030 2.6615
a. Against which currencies did the U.S. dollar weaken in 2004? Strengthen? The U.S. dollar weakened against all the currencies, although the change against the yuan was practically zero.
b. What is the exchange rate of each currency on December 31, 2004 in terms
of dollars per unit of the foreign currency?
c. Which currency changed the most against the dollar in 2004? The least? In 2004, the Swiss franc changed the most against the dollar—it strengthened by
8.9%. The Chinese yuan changed the least (0%) against the dollar.
2. Exchange Rate Relationships. Below are the exchange rates between the U.S.
dollar and five different currencies. The rates are quoted in terms of the number of dollars per unit of the foreign currency.
Mexican peso .08911 .089654
Argentine peso .3441 .3366
Thai baht .02526 .02568
S. Korean won .0008372 .0009751
Indian rupee .0220 .02289
a. Against which currencies did the U.S. dollar weaken in 2004? Strengthen? The U.S. dollar strengthened against the Argentine peso and weakened against the other currencies. Since a peso could get you fewer dollars in 2004, it
weakened against the dollar, which means that the dollar strengthened against the peso. The opposite would be true of the other currencies.
b. What is the exchange rate of each currency on December 31, 2004 in terms of units of foreign currency per dollar?
c. Which currency changed the most against the dollar in 2004? The least? The won strengthened by 16.5% against the dollar, and the Mexican peso hardly changed at all.
3. Assume the following spot exchange rates between the U.S. dollar and the British pound sterling:
March 1 $1.8685
March 31 $1.8258
April 30 $1.7740
On March 1, XYZ, a U.S. company, sells goods to a British importer for £1,000,000. Payment is to be received on April 30, and XYZ adjusts its financial statements quarterly. What are the journal entries for XYZ on March 1, March 31, and April 30? Was the dollar strengthening or weakening over the period of the contract? March 1 Accounts Receivable 1,868,500
Sales Revenue 1,868,500
£1,000,000 * $1.8685 = 1,868,500
March 31 Foreign exchange loss 42,700
Accounts Receivable 42,700
($1.8685 - $1.8258) * £1,000,000 = 42,700
April 30 Cash 1,774,000
Foreign exchange loss 51,800
Accounts Receivable 1,825,800
£1,000,000 * $1.7740 = 1,774,000
($1.8258 - $1.7740) * £1,000,000 = 51,800
The dollar was strengthening over the period of the contract.
Ch.12
2.
A
A product line makes the most sense for Hoeschst since its products are so diverse.
B
If the organizational structure is highly centralized, Hoeschst may want to keep a main set of books according to German GAAP or IAS. However, the subsidiaries may also need to keep a separate set of books in order to comply with local laws. Reconciling these needs, along with differences in foreign exchange and local laws, may complicate Hoeschst’s international accounting function.
C
As an MNE becomes larger and enters more countries, it faces the challenge of compatibility of information from various divisions. During the late 1980’s and early 1990’s, most companies had separate information systems for each functional area and division. One way to overcome this problem is by using an Enterprise Resource Planning (ERP) system. The purpose of ERP is to integrate all departments and functions under one computer system. In other words, all companywide data is stored in one place and can be extracted and manipulated in any way to fit the needs of the different functions and departments of a firm. Even with the new software, the cultural issues involving management from different countries needs to be solved. Also, Hoeschst needs to standardize hardware and software to reduce costs and allow information to be transferred easily.
3.
A
P&G is organized according to product lines. There are U.S. product lines and then global product lines.
B
P&G’s board of directors is comprised of about 80% outside directors. The chairman of the board, A.G. Lafley, is also the CEO. The board has six committees: audit; compensation and leadership development; executive; finance; governance and public responsibility; and innovation and technology.
C
One of the challenges P&G would face is the fact that its CEO is also Chairman of the Board. This means that he can determine internal control procedures, and he is responsible both for the daily operations of the firm as well as to represent shareholders’ interests. Having the CEO and the Chairman of the Board be one person may impair the Board’s independence and/or weaken its resolve to contradict management if it acts against shareholders’ interests.
D
The head of the audit committee is John F. Smith, Jr. He is the Chairman of the Board at Delta Air Lines and was previously the Chairman of the Board and CEO at General Motors. He has been the audit committee director since 1995. The internal audit function at P&G is very important because P&G produces a diverse range of products and operates in many different countries. This provides opportunities for mistakes and fraud.
Ch. 13
1
Nissan is concerned about economic risk—the potential for change in expected cash flows. It arises from the pricing of products, the sourcing and cost of inputs, and the location of investments.
Nissan could enter into a forward contract to deliver foreign currency at the same time the company is expected to collect foreign currency from the foreign customer. That way a gain on the foreign currency receivable would be offset by a loss in the foreign currency payable, thus netting the gain and loss. This is simpler and less expensive than an operating hedge (moving production to the United States). However, forward contracts are usually only used to hedge specific financial transactions. If Nissan expected possible trade barriers or long-term changes in the exchange rate, investing money in U.S. production may be the better way to offset long-term political and/or economic barriers.
5
XYZ would pay $925,926, which is ¥100,000,000 converted at the forward rate of ¥108 quoted on January 1 for delivery on February 28.
The dollar value of the purchase is $909,091, which is ¥100,000,000 translated at the spot rate of ¥110 per dollar on January 1. Any changes in the exchange rate at subsequent dates are taken to income.
Ch14
1
A
As noted in the chapter, ROI is not a good measure to use if intercorporate
transfers are significant and are not at arm’s-length prices. ROI also should not be used for some foreign operations, such as when sales subsidiaries buy all their products from other subsidiaries.
B
As stated in the book, sales or market share are appropriate evaluation targets for subsidiaries who have no control over their input costs and whose primary purpose is to sell the goods of some other unit.
C
If the Korean subsidiary were evaluated on sales, it should receive a good evaluation in 2005 and a bad evaluation in 2006. If the subsidiary were
evaluated on market share, it would receive a good evaluation in both 2005 and 2006.
D
If the Korean subsidiary’s managers were involved in budget-setting, it is appropriate to evaluate the subsidiary on a budget-to-actual base. If the
Korean subsidiary manufactured its own finished goods, then profitability would be an appropriate performance measure.
14
A
The BSC approach takes a broader view of business performance by identifying the drivers of long-term competitive performance and linking them to financial performance. However, the cultural, geographical, and financial complexity of an MNE makes it challenging to establish a set of interrelated, cause-and-effect performance measures.
B
Adequate use of the BSC helps managers avoid using only one measure of performance (such as ROI or sales growth), and forces them to link financial measures with the non-financial factors that drive them. In addition, subsidiaries are evaluated based on a coherent set of performance bases instead of just one base that may or may not be directly controlled by that subsidiary.
C
Philips’ four critical success factors included measures that are applicable to each division, no
matter where it is located. Additionally, lower-level managers were responsible to set goals that c orresponded to management’s overall goals. This ensured that goals at different levels of the company were aligned, yet it allowed managers to set individual goals based on their own subsidiary’s position and needs.
D
The other areas in the balanced scorecard approach reveal the drivers of long-term competitive performance. In simple terms, learning and growth help create more efficient business processes, which create value for customers, who reward the firm financially. The significant aspect about this measurement approach, however, is that it also creates a focus for the future because the measures used communicate to managers what is important.
Discussion questions
Chapter 1
Page 30
1. Chances are you will someday work for a MNE. What accounting skills do you think you will need to succeed in an international environment?
● The skill of developing consolidated financial statements and segment reporting ● The skill of analyzing international financial statement and international
accounting differences
● The knowledge of accounting for foreign currency and price changes
● The skill of managing foreign exchange exposure
● The skill of international budgeting and performance evaluation
● The skill of international auditing
● The skill of international taxation
Chapter 2
Page 45
2. What is accounting values?
● Professionalism versus statutory control
● Uniformity versus flexibility
● Conservatism versus optimism
● Secrecy versus transparency
Page 55
3. Why is the classification of accounting systems likely to be useful?
● It helps us describe and compare international accounting systems in a way that
will promote improved understanding of the complex realities of accounting practice
● It helps policymakers assess the prospects and problems of international
harmonization
● The education of accountants and auditors who operate internationally would be
facilitated by an appropriate classification system
● Such a system would promote a better understanding of and solution to
problems involving the establishment of appropriate accounting and control systems for MNEs
Chapter 5
Page 112
4. What are the following groups concerned about when looking at foreign financial statements?
● Banks/creditors:
Corporate information relating to financial position, performance, and future prospects, particularly the security of loans advanced
● Investors:
• Information relating to the performance and future prospects of the
worldwide operations of the MNE group and, in particular, geographical and line-of-business segmentation
● Industry analysts:
● Managers:
5. Should international management of international companies be concerned about the international differences in accounting methods? Why or why not? If yes, which differences are especially important to management?
● International management of international companies should be concerned
about the international differences in accounting methods
● Because international accounting differences impact the assessment of earning
and future cash flows and their associated risks and uncertainty. These assessments are important to corporations concerned with FDI, which involves the valuation of potential acquisitions and participating interests/joint ventures or the raising of capital of the listing/trading of stocks on foreign stock exchanges ● Important difference to management:
• Measurement basis: property, plant and equipment, inventories
• Depreciation accounting
• Construction contracts
• Research and development costs
• Borrowing costs of assets
• Exchange rates for income statement translation
• Retirement benefits
• Deferred taxation
• Business combinations
• Goodwill
• Intangibles
6. What is the advantage of seeking funding in the international market?
● Spread risk in a wider rage
● Make full use of the financial markets in different countries
● Can use international trade finance and other special financing way
● Easy access to international capital markets
● Reduce financing cost
7. If accounting principles around the world are harmonized, will this necessarily eliminate the diversity of earnings measurements practices?
● It will not. Because the factors contributing to the difference of accounting principles still exist and can’t be eliminated in a short time, such as the economic environment, Political and legal system, culture etc. •
8. How does the conservatism index relate to risk? In other words, does a more conservative country inherently have less risk?
Chapter 6
Page 146
9. What is meant by corporate transparency? Is it sufficient to disclose financial information?
● Corporate transparency can be defined as the widespread availability of relevant,
reliable information about the period performance, financial position, investment opportunities, governance, value, and risk of publicly traded firms. ● It is not sufficient to disclose financial information. Because we can only analyze
the financial status of a corporate, such as liquidity and capital resources, asset valuations and inflation.
● Sufficient disclosure should also include strategic and nonfinancial information.
Strategic information shows us the strategy and prospect of a corporate. Nonfinancial information, which is relevant to human resources, social responsibility and many other aspects, reflects the overall performance of a corporate.
10. Explain the incentives that might encourage management to disclose information.
● First, management provides information in respond to regulation.
● Second, management provides information voluntarily because it perceives it to
be in its own interests and those of the corporation to respond to the information demands of users and participant groups.
11. What are the likely costs to MNEs of making additional voluntary disclosures? ● Direct cost of disclosure is made up of
• The value of resources used in gathering and processing the information • The cost of auditing and communicating the information
● Indirect costs include
• Competitive disadvantage
• Costs of government interference
12. In which countries are stock exchange disclosure regulations most stringent? Less stringent? What are the reasons for this?
● Most stringent: U.S., U.K.
● Less stringent: Germany, Swizerland
●
13. Discuss the kinds of information you would like to see in the corporate review, the operations review, and the financial review sections of an MNEs directors ’ report.
Chapter 7
Page 173
13. The IASB’
s governance structure.
Chapter 8
Page 218
14. Why has accounting for goodwill become such a significant problem internationally?
● Goodwill incorporates the value of future earnings, and it relates to the valuation
of the business as a whole. Accordingly, it is currently a matter of considerable controversy as to whether goodwill should be treated as an asset for accounting purposes and, if so, whether or not it should be amortized against future earnings.
● This is an important issue because profits are used as a significant indicator of
business performance. Moreover, if assets are indicators of financial strength, then the question arises whether the “value ” of goodwill is relevant in contrast to the traditional emphasis on the existence and cost of tangible assets.
15. While the trend among MNEs around the world is to prepare consolidated financial statements, it has been suggested by experts that such statements may hide more than they reveal. Do you agree?
Chapter 9
Page 242
16. How is segment information likely to help investors in MNEs?
● Segment information is likely to help investors by allowing them to combine
company-specific information with external information, thus allowing for a more accurate assessment of both the risks involved and the potential for future growth.
● In addition, investors can gain an idea of the success of past operations by
comparing them with the performance of similar operations.
17. Discuss the likely benefits of segment reporting, with particular reference to the results of predictive ability and stock market research.
● Results of studies of predictive ability have shown that both LOB and
geographical segmental data are more useful than consolidated data for the prediction of earnings.
● Stock market research relating to risk management suggests that disclosure of
LOB and geographical segment data results in a decrease in a company’s riskiness as perceived by investors.
18. Identify the likely costs of segment reporting.
● The cost of compiling, processing, and disseminating information.
● The cost of disseminating information that is likely to benefit existing or potential
competitors
19. Explain the reasons behind using organizational structures as a basis for segment identification.
● It should normally provide the best evidence of an enterprise ’s predominant
source of risks and returns.
● This will determine whether the “primary ” segment reporting format will be
business segments or geographical segments, with a higher level of disclosure relative to the secondary reporting format.
Chapter 10
Page 276
20. XYZ prefers to translate the result of its Singapore subsidiary into dollars using the current rate method. What is the advantage to XYZ of using the current rate method? As its auditor, what do you think of its decision? If its decision is wrong and it should be using the temporal method, is it possible for XYZ to change?
Chapter 12
Page 335
21. Under what conditions should an MNE adopt a multi-domestic strategy? How about a global strategy or a transnational strategy?
Multi-domestic strategic companies
● Have products that differ from country market to country market
● High transportation costs
● Economies of scale may be too modest
● R&D closely tied to a specific market
● Government barriers to trade are too high
● Distribution systems are fragmented and impenetrable
Global strategic companies
● Benefits gained from worldwide volume exceed costs of serving that volume ● Usually more centralized than multi-domestic strategic companies
● See example at chapter end – Proctor and Gamble and Unilever
Transnational strategy
● 3 Global Imperatives
• Forces for global integration – the need for efficiency
• Forces for local differentiation – the need for responsiveness
• Forces for worldwide innovation – the need for learning
● Companies must deal with all 3 simultaneously
● Companies should use a transnational strategy
• Corporate assets are dispersed, interdependent, and specialized
22. The implication from the discussion in this chapter is that as a company becomes more global, it concentrates more on the informal and subtle mechanisms for controlling global operations than it does the structural and formal mechanisms. Why is this so? Do you think structural and formal mechanisms are becoming obsolete? Discuss your reasons.
23. Explain how lateral relations, informal communications, and organizational culture act as informal control mechanisms.
Lateral relations
● Task forces and meetings help throughout the formal structure to accomplish
corporate objectives
Informal communication
● Involves the network of personal contacts that one develops over time in the
organization
Organizational culture
● The outcome of the process of socializing individuals within a firm and across
national boundaries, which allows things to be done by different people in similar or consistent ways
Chapter 13
Page 353
24. The unbiased forward rate theory.
25. Types of hedging exposure.
● Transaction Exposure
• When a company engages in foreign currency transactions, a foreign
exchange risk is incurred
● Translation or Accounting Exposure
• Accounting exposure arises when a company translates its financial
statements from one currency to another for consolidation purposes
● Economic (Operating) Exposure
• Economic exposure is the potential for change in expected cash flows
Page 372
26. What are the major differences between a forward contract and a futures contract and between a forward contract and an options contract.
● The major differences between a forward contract and a futures contract
• A futures contract is traded on an exchange, not OTC
• A forward contract is tailored to the amount and time frame that the
company needs, whereas a futures contract is for a specific amount and specific maturity date
• The future contract is less valuable to a company than a forward contract • May be useful to speculators and small companies
• Contract months are March, June, September, December
• Less flexible than forward contracts
● The major differences between a forward contract and an options contract
• An option is the right but not the obligation to trade foreign currency at a
given exchange rate on or before a given date in the future
• An option can be traded on an exchange or with a financial intermediary • There are two parties to an option, the writer of the option and the holder
of the option. Holder determines whether or not the option will be
exercised
Chapter 14
Page 410
27. How can management accounting play a role in the strategic planning process? ● Identify the criteria for performance
● Monitor achievement against these criteria
28. What does EVA measure? How is it different from ROI? In your own words, explain why a positive EVA increases shareholder value.
● EVA = After-tax profit – Total cost of capital
● Measure of the total value added or depleted from shareholder value in one period
● Many companies make profits when calculating the profits in a traditional way such as
measuring by ROI. However, shareholder value is actually deleted in many cases, because the profit is lower than the total cost of capital. When profit is measure by EVA, it is defined by shareholder. For example, if shareholders hope the Return on investment to be 10%, they will only consider making money when the after-tax profit is greater than total cost of capital. Therefore, a positive EVA increases shareholder value because its sustainable growth will increase the market value of the company.
29. How can the Balanced Scorecard(BSC) help MNEs establish a set of adequate performance measurement criteria for the entire company, its subsidiaries, and subsidiary managers?
● Helps managers avoid using only one performance measure
● Forces managers to link financial measures with the non-financial factors that drive them
● Ensures that subs are evaluated based on a coherent set of performance bases
Exercises
Chapter 8
Page 219
3. Simple Consolidation Problem.
ASSETS
Cash 100
Accounts Receivable 350
Inventory 250
Plant and Equipment 1400
Investment in Marit 88 80% 10 50 20 150 - 110 395 270 1550 - (400 – 5)
Totals Assets 2188 230 2325
LIABILITIES 1320 120 1435 (1440 – 5)
Minority Interest 22 (110 x 20%)
EQUITY 868 110 868 Same as parent equity
TOTAL LIABILITIES
AND EQUITY 2188 230 2325
===================================================
INCOME
Sales 1500 400 1900
Income from Sub1 64 -
EXPENSES 750 320 1070
Minority Interest Income - - 16 (80 x 20%) Net Income 814 80 814 Same as parent NI ===================================================
Chapter 9
13.
Ch 10
1. Exchange Rate Relationships. Below are the exchange rates between the U.S.
dollar and five different currencies. The rates are quoted in terms of the number of units of the foreign currency to the dollar.
Euro .79670 .73310
British pound .56250 .51920
Swiss franc 1.2423 1.1318
Chinese yuan 8.2867 8.2865
Brazilian real 2.9030 2.6615
a. Against which currencies did the U.S. dollar weaken in 2004? Strengthen? The U.S. dollar weakened against all the currencies, although the change against the yuan was practically zero.
b. What is the exchange rate of each currency on December 31, 2004 in terms
of dollars per unit of the foreign currency?
c. Which currency changed the most against the dollar in 2004? The least? In 2004, the Swiss franc changed the most against the dollar—it strengthened by
8.9%. The Chinese yuan changed the least (0%) against the dollar.
2. Exchange Rate Relationships. Below are the exchange rates between the U.S.
dollar and five different currencies. The rates are quoted in terms of the number of dollars per unit of the foreign currency.
Mexican peso .08911 .089654
Argentine peso .3441 .3366
Thai baht .02526 .02568
S. Korean won .0008372 .0009751
Indian rupee .0220 .02289
a. Against which currencies did the U.S. dollar weaken in 2004? Strengthen? The U.S. dollar strengthened against the Argentine peso and weakened against the other currencies. Since a peso could get you fewer dollars in 2004, it
weakened against the dollar, which means that the dollar strengthened against the peso. The opposite would be true of the other currencies.
b. What is the exchange rate of each currency on December 31, 2004 in terms of units of foreign currency per dollar?
c. Which currency changed the most against the dollar in 2004? The least? The won strengthened by 16.5% against the dollar, and the Mexican peso hardly changed at all.
3. Assume the following spot exchange rates between the U.S. dollar and the British pound sterling:
March 1 $1.8685
March 31 $1.8258
April 30 $1.7740
On March 1, XYZ, a U.S. company, sells goods to a British importer for £1,000,000. Payment is to be received on April 30, and XYZ adjusts its financial statements quarterly. What are the journal entries for XYZ on March 1, March 31, and April 30? Was the dollar strengthening or weakening over the period of the contract? March 1 Accounts Receivable 1,868,500
Sales Revenue 1,868,500
£1,000,000 * $1.8685 = 1,868,500
March 31 Foreign exchange loss 42,700
Accounts Receivable 42,700
($1.8685 - $1.8258) * £1,000,000 = 42,700
April 30 Cash 1,774,000
Foreign exchange loss 51,800
Accounts Receivable 1,825,800
£1,000,000 * $1.7740 = 1,774,000
($1.8258 - $1.7740) * £1,000,000 = 51,800
The dollar was strengthening over the period of the contract.
Ch.12
2.
A
A product line makes the most sense for Hoeschst since its products are so diverse.
B
If the organizational structure is highly centralized, Hoeschst may want to keep a main set of books according to German GAAP or IAS. However, the subsidiaries may also need to keep a separate set of books in order to comply with local laws. Reconciling these needs, along with differences in foreign exchange and local laws, may complicate Hoeschst’s international accounting function.
C
As an MNE becomes larger and enters more countries, it faces the challenge of compatibility of information from various divisions. During the late 1980’s and early 1990’s, most companies had separate information systems for each functional area and division. One way to overcome this problem is by using an Enterprise Resource Planning (ERP) system. The purpose of ERP is to integrate all departments and functions under one computer system. In other words, all companywide data is stored in one place and can be extracted and manipulated in any way to fit the needs of the different functions and departments of a firm. Even with the new software, the cultural issues involving management from different countries needs to be solved. Also, Hoeschst needs to standardize hardware and software to reduce costs and allow information to be transferred easily.
3.
A
P&G is organized according to product lines. There are U.S. product lines and then global product lines.
B
P&G’s board of directors is comprised of about 80% outside directors. The chairman of the board, A.G. Lafley, is also the CEO. The board has six committees: audit; compensation and leadership development; executive; finance; governance and public responsibility; and innovation and technology.
C
One of the challenges P&G would face is the fact that its CEO is also Chairman of the Board. This means that he can determine internal control procedures, and he is responsible both for the daily operations of the firm as well as to represent shareholders’ interests. Having the CEO and the Chairman of the Board be one person may impair the Board’s independence and/or weaken its resolve to contradict management if it acts against shareholders’ interests.
D
The head of the audit committee is John F. Smith, Jr. He is the Chairman of the Board at Delta Air Lines and was previously the Chairman of the Board and CEO at General Motors. He has been the audit committee director since 1995. The internal audit function at P&G is very important because P&G produces a diverse range of products and operates in many different countries. This provides opportunities for mistakes and fraud.
Ch. 13
1
Nissan is concerned about economic risk—the potential for change in expected cash flows. It arises from the pricing of products, the sourcing and cost of inputs, and the location of investments.
Nissan could enter into a forward contract to deliver foreign currency at the same time the company is expected to collect foreign currency from the foreign customer. That way a gain on the foreign currency receivable would be offset by a loss in the foreign currency payable, thus netting the gain and loss. This is simpler and less expensive than an operating hedge (moving production to the United States). However, forward contracts are usually only used to hedge specific financial transactions. If Nissan expected possible trade barriers or long-term changes in the exchange rate, investing money in U.S. production may be the better way to offset long-term political and/or economic barriers.
5
XYZ would pay $925,926, which is ¥100,000,000 converted at the forward rate of ¥108 quoted on January 1 for delivery on February 28.
The dollar value of the purchase is $909,091, which is ¥100,000,000 translated at the spot rate of ¥110 per dollar on January 1. Any changes in the exchange rate at subsequent dates are taken to income.
Ch14
1
A
As noted in the chapter, ROI is not a good measure to use if intercorporate
transfers are significant and are not at arm’s-length prices. ROI also should not be used for some foreign operations, such as when sales subsidiaries buy all their products from other subsidiaries.
B
As stated in the book, sales or market share are appropriate evaluation targets for subsidiaries who have no control over their input costs and whose primary purpose is to sell the goods of some other unit.
C
If the Korean subsidiary were evaluated on sales, it should receive a good evaluation in 2005 and a bad evaluation in 2006. If the subsidiary were
evaluated on market share, it would receive a good evaluation in both 2005 and 2006.
D
If the Korean subsidiary’s managers were involved in budget-setting, it is appropriate to evaluate the subsidiary on a budget-to-actual base. If the
Korean subsidiary manufactured its own finished goods, then profitability would be an appropriate performance measure.
14
A
The BSC approach takes a broader view of business performance by identifying the drivers of long-term competitive performance and linking them to financial performance. However, the cultural, geographical, and financial complexity of an MNE makes it challenging to establish a set of interrelated, cause-and-effect performance measures.
B
Adequate use of the BSC helps managers avoid using only one measure of performance (such as ROI or sales growth), and forces them to link financial measures with the non-financial factors that drive them. In addition, subsidiaries are evaluated based on a coherent set of performance bases instead of just one base that may or may not be directly controlled by that subsidiary.
C
Philips’ four critical success factors included measures that are applicable to each division, no
matter where it is located. Additionally, lower-level managers were responsible to set goals that c orresponded to management’s overall goals. This ensured that goals at different levels of the company were aligned, yet it allowed managers to set individual goals based on their own subsidiary’s position and needs.
D
The other areas in the balanced scorecard approach reveal the drivers of long-term competitive performance. In simple terms, learning and growth help create more efficient business processes, which create value for customers, who reward the firm financially. The significant aspect about this measurement approach, however, is that it also creates a focus for the future because the measures used communicate to managers what is important.