Accounting and Finance in the International Business

investment decisions
what to finance
financing decisions
how to finance those decisions
1. raise funds on global capital market
2. raise funds from local sources
money management decisions
how to manage the firm’s financial resources most effciently
accounting standarads
rules for preparing financial statements
auditing standards
specify the rules for preforming an audit
International Accounting Standards Board (IASB)
a major proponent of standardization of accounting standards
Lessard-Lorange Model
firms can deal with the problems of exchange rates and control in three ways
capital budgeting
involves estimating the cash flows associated with the project over time, and then discounting them to determine their net present value
political risk
the likelihood that political forces will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business
economic risk
the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a business (biggest risk is inflation)
money management
decisions attempt to managed global cash resources efficiently
1. minimize cash balances
2. reduce transaction costs
3. minimize corporate tax burden
minimize cash balances
need cash balances on hand for notes payable and unexpected demands
reduce transaction costs
the cost of exchange
transfer fee
fee for moving cash from one location to another
multilateral netting
can reduce the number of transactions between subsidiaries and the number of transaction costs
double taxation
occurs when the income of a foreign subsidiary is taxed by the host-country government and by the home-country government
tax credits
allow the firm to reduce the taxes paid to the home government by the amount of taxes paid to the foreign government
tax treaties
agreement specifying what items of income will be taxed by the authorities of the country where the income is earned
deferral principle
specifics that parent companies are not taxed on foreign source income until they actually receive a dividend
tax havens
countries with a very low, or no, income tax – firms can avoid income taxes by establishing a wholly-owned, non-operating subsidiary in the country
royalties
the remuneration paid to owners of technology, patents, or trade names for the use of that technology or the right to manufacture and/or sell products under those patents or trade names
fee
compensation for professional services or expertise supplied to a foreign subsidiary by the parent company or another subsidiary
transfer prices
the price at which goods and services are transferred between entities within the firm
fronting loans
loans between a parent and its subsidiary channeled through a financial intermediary, usually a large international bank
Accounting systems in the US and Great Britain
oriented toward individual investors
Accounting systems in Switzerland and Germany
focus on giving info. to banks
how can firms adjust for political and economic risk
– raise discount rate in countries where risk is high
– lower future cash flow estimates
cost of capital is usually lower in global capital market? (t/f)
true