International Accounting

& Multinational
Enterprises
Lee H. Radebaugh
Sidney J. Gray
Ervin L. Black
6th edition
John Wiley & Sons, Inc.

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

 Chapter 1
International Accounting
and
International Business

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

The International Development of
the Accounting Discipline
 Double-entry accounting
 Developed in Italy between the 13th and 15th Centuries
 Spread to other European countries
 Luca Pacioli – Summa de Arithmetica
 Memorandum book, journal, and ledger
 Adapted due to changes in
 Business form
 Taxation
 Globalization

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

National Differences in
Accounting Standards
 Many different systems throughout the world
 Reconciliation is still a challenge
 Accounting systems
 Evolve
 Reflect the environments they serve
 Development of accounting influenced by
 Educational systems
 Legal systems
 Political systems
 Sociocultural characteristics

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

The Evolution and Significance of
International Business
 Began with the Greeks around the fifth
century B.C.
 Trade became a privilege granted by the
state
 16th and 17th centuries saw the first major
foreign investments (colonies)
 Center of commercial and business activity
shifted westward

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

The Evolution and Significance of
International Business
 Industrial Revolution
 Multinational firms developed – Ford, Singer
 Foreign investments become more influential
 Post-World War II Period
 International business stunted
 Great Depression
 World War II
 Renewal in foreign trade and investment
 Formation of European Economic Community (now the
European Union)
 Greater stability

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Reasons for International
Involvement
 Expand sales
 Excess capacity
 Greater profit potential
 Gain access to
 Raw materials
 Other factors of production (cheap labor)
 Knowledge
 New developments in technology

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Forms of International
Involvement
 Exports and imports of goods and services
 Strategic alliances
 Licensing agreement (intangible property)
 Franchise agreement (Holiday Inn, McDonald’s)
 Investment abroad
 Direct investment
 Joint venture

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Multinational Enterprises
 Possess a worldwide view of
 Production
 Sourcing of raw materials and components
 Final markets
 Elite MNE
 10% of a company’s overall assets, earnings, and
employees are abroad
 Significant geographical spread
 International experience of executives

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Multinational Enterprises

Firm Size and Probability of

Saturation of International
Domestic Market Transactions

 Small companies
 Export and import
 Manufacture products abroad or outsource
production
 Licensing agreements.

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Large Multinational
Enterprises
Top 10 Companies by Market Value in 2004
Source: Business Week Global 1000
Rank Market Value
Name Country
2004 2003 ($ Billions)
 1  1 General Electric U.S.   328.11
 2  2 Microsoft U.S.   284.43
 3  3 Exxon Mobil U.S.   283.61
 4  4 Pfizer U.S.   269.66
 5  5 Wal-Mart Stores U.S.   241.19
 6  6 Citigroup U.S.   239.43
7 9 BP   Britain 193.05
8 10 American International Group U.S.   191.18
9 13 Intel U.S.   184.66
10 8 Royal Dutch Petroleum Netherlands 174.83
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Large Multinational
Enterprises
Top 10 Companies by Sales in 2003
Source: Fortune Global 500
Rank Sales
Name Country
2003 2002 ($ Billions)
 1  1 Wal-Mart Stores U.S. 263.00
 2  5 BP Britain 232.57
 3  3 Exxon Mobil U.S. 222.88
 4  4 Royal/Dutch Shell Group Britain/Neth. 201.73
 5  2 General Motors U.S. 195.32
 6  6 Ford Motor U.S. 164.51
7 7 DaimlerChrysler Germany 156.60
8 8 Toyota Motor Japan 153.11
9 9 General Electric U.S. 134.18
10 14 Total France 118.44
International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black
Deciding to Become Global
 Assessment of
 External environment
 Internal capabilities of the firm
 Environmental constraints
 Educational, sociological, political and legal, and
economic
 Country-specific advantages (cheap materials,
labor)
 Firm-specific advantages – intangible assets

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Environmental Influences on
Accounting
 Enterprise ownership
 Broad ownership
 State ownership
 Family ownership
 Business activities influence the nature of the accounting system
 Sources of finance and pressure for accountability
 External shareholders
 Banks
 Family sources
 Taxation
 Accounting systems influenced by state objectives (France)
 Accounting systems separate from state objectives (U.S.)

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Environmental Influences on
Accounting
 Developed accounting profession
 Judgmentally based accounting systems
 Depends upon accounting education and
research
 Political system – accounting system reflects
political philosophy
 Social climate – level of employee awareness

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Environmental Influences on
Accounting
 Economic growth and development
 Inflation leads to alternative approaches
 Legal system and regulation of accounting
 Civil codes (France and Germany)
 Common law (U.S. and U.K.)
 Culture (societal or national values)
 International factors
 Colonial influence
 Regional trade blocs (European Union)

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Accounting Standards and
Traditions
 International Accounting Standards Board
 Works for convergence
 Former socialist economies are adjusting
 Russia and Eastern Europe
 British and continental European traditions are now
being coordinated

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Major Development Factors
 Corporations recognized as legal entities with
limited liability
 Protects shareholders and creditors
 Professional management
 A point of controversy
 Emergence of securities markets
 Fundamental element of the transition to a market
economy
 Shows need to attract foreign investment
 Broadened disclosure

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Major Development Factors
Exhibit 1.2: Market Capitalization by National
Securities Market (Top 5 Countries)

United States
26%
Great Britain
Japan
43% France
Rest of the World
4%

7%

20%

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Corporate Disclosure
 Disclosure to finance providers can be seen as a
spectrum
 Least disclosure – shareholders and investors
 Varied disclosure – depends on the purpose of the
disclosure and the power of the finance provider
 Accounting disclosure
 Used as a means of national economic planning and
control (Examples – France and Sweden)
 Accounting professionals
 Played a key role in developing accounting systems
(Examples – U.S. and U.K.)

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Trends in Securities Markets
 Strong move to attract foreign companies to
list on exchanges
 2004 – trading volume of non-U.S. firms listed on
NYSE was 10.5% of the Exchange’s total trading
volume
 Consolidation of exchanges
 Exchanges in developing countries are
growing

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

A Wider Audience
 Increased disclosure to other groups
 Employees, trade unions, consumers,
government agencies, and the general public
 Expectations of nonfinance providers
 Not clearly defined
 Techniques to measure them do not exist
 Less developed countries have less
accountability and disclosure

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Accountability and
Multinational Enterprises
 Demand for greater disclosure by the host
country can be a bargaining tool
 MNE view
 Just a part of global operations
 Some MNEs have acted in ways detrimental to a
host country.
 Host country’s view
 Business activities of an MNE are of primary
concern

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Accountability and
Multinational Enterprises
 Domestic Corporations
 Primary operations in one country
 Cross-frontier relationships with unrelated parties
 Multinational Enterprises
 Operate in many countries with different laws and
currencies
 Significant volume of transactions between units
located in different countries

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

Accounting Aspects of
International Business
 Exposure to International Accounting
 Importing or exporting
 Costs of outside expertise
 Increase with increased trade
 Should develop in-house experts
 Separate organization to handle international trade
 Establishment of a foreign unit
 Awareness of international market conditions
 Lower cost of capital

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black

The Field of International
Accounting
 Descriptive/comparative accounting
 Important issues
 Forces and conditions that create international differences
 Trend toward convergence
 International transactions/multinational enterprises
 Important issues
 Financial reporting problems
 Translation of foreign currency financial statements,
 Information systems
 Budgets and performance evaluation
 Audits
 Taxes

International Accounting & Multinational Enterprises - Chapter 1 - Radebaugh, Gray, Black