Choi/Meek, 6/e 1
International Accounting, 6/e
Frederick D.S. Choi
Gary K. Meek
Learning Objectives
What are the critical dimensions of business modeling?
What is involved in measuring the returns on a foreign investment. How
does it differ from the domestic case?
How does one calculate a multinational company’s cost of capital?
Are there any issues involved in designing multinational information and
control systems?
What is financial control and what are some international control
issues?
How does Kaizen costing differ from traditional standard costing
concepts?
What is involved in an exchange rate variance analysis?
What issues do managers face in evaluating their foreign operations?
What are some approaches employed by multinational companies to
Choi/Meek, 6/e
3
What Are the Critical Dimensions
of Business Modeling?
Identifying key factors likely to affect the
future progress of the company.
Forecasting future developments and
assessing the firm’s ability to undertake
appropriate responses.
Developing information systems to support
strategic choices.
Translating selected options into specific
Planning Tools - WOTS-Up
Analysis
Involves assessing corporate strengths and
Planning Tools - Capital
Budgeting
Involves analyzing the benefits and costs of a proposed investment.
Multinational adaptations of traditional investment planning models:
Home country vs. host country perspective. Return perspectives may vary owing to:
Repatriation restrictions
Licensing fees and other payments
Differing rates of inflation
Foreign exchange risk
Differential taxes
Measuring expected returns is more complex owing to:
Choice of project vs. parent cash flows
Choice of financing
Subsidized financing
Political risk
See Exhibit 10-2 on the next slide.
Measuring the cost of capital is complex due to:
Foreign exchange risk. Inflation risk.
Issues in Designing Multinational
Information Systems
Why is the design of management
Issues in Designing Multinational
Information Systems (contin)
Systems issues
Geographical distance
Corporate strategies
Low dispersal/high centralization
High dispersal/low centralization
High dispersion/high centralization
Global competition
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Issues in Designing Multinational
Information Systems (contin)
Information issues
Cultural differences
GAAP restatements
Currency translation
Hyperinflation
Overstating or understating revenues and expenses
Reporting translation gains and losses that are difficult
to interpret
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13
What is Financial Control?
Financial control:
a measurement and
communication system that assures that all of
a firm’s organizational units work toward the
accomplishment of enterprise goals as
What is Financial Control?
(contin)
How is financial control achieved?
Communicating financial goals throughout the organization.
Specifying criteria and standards for evaluating performance.
Monitoring actual performance.
Communicating deviations between actual and expected
performance to those responsible.
Issues?
Should control systems be tailored to the local environment?
Unforseen consequences of environmental diversity.
Language
Attitudes toward risk and authority
Differences in need achievement levels
Diversity in business practices
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Operational Budgeting
Local vs. parent currency perspectives
Exchange rate combinations to establish foreign
currency budgets and monitor performance
To establish budgets
Spot rate in effect when budget is established
Projected rate
Ending rate
To monitor performance
Initial spot rate
Projected rate
Ending rate
Operational Budgeting (contin)
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Operational Budgeting (contin)
Three-way
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Strategic Costing
Cost control using standard costing systems
Estimated production costs vs. actual production
costs
Target costing
Strategic Costing (contin)
Kaizen costing
Continuous cost
reduction
Behavioral costing
Cost allocations to
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Performance Evaluation Issues
Objectives of performance evaluation
Align managerial behavior with strategic goals.
Measure profitability of organizational units.
Identify sub-par performance.
Allocate corporate resources optimally.
Performance Evaluation Issues
(contin)
Performance
evaluation issues
Unit vs. managerial
performance
Non-controllable
influences on unit
performance
Headquarters
management
Host government
Parent country’s
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Performance Evaluation Issues
(contin)
Performance criteria
Financial vs. non-financial Measurement issues
Inflation distortions
Cost of goods sold understated Capital employed understated
Returns on capital doubly overstated
Spurious comparisons of divisional performance Meaningless inter-country performance comparisons Invalid performance comparisons over time
Performance evaluation practices: ICI vs. GE
Performance standards
Foreign subsidiaries should not be evaluated as independent profit centers when their
mission is strategic.
Company-wide ROI criteria should be supplemented by performance measures tailored to
the mission and local operating environment.
Performance budgets should take into account each unit’s internal and external environment. Subsidiary managers should not be held responsible for non-controllable events.
Subsidiary managers should participate in the budgeting process.
Both financial and non-financial measures should be used in multinational performance
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