Chapter 20. Accounting and Finance in the International Business

Transcription

1 Chapter 20 Accounting and Finance in the International Business

2 Miscommunications Miscommunications Many forms Video brief Miscommunications Miscommunications in global accounting Different standards (reporting) Different languages (currencies) Different regulations (taxes)

3 Country Differences In Accounting Standards Accounting systems evolve Respond to demand for accounting information Difficult to harmonize across countries One study found that among 22 countries: 76 ways to assess the cost of goods sold 65 differences in calculating return on assets 20 ways to calculate net profits Different ways to count Challenge to compare financial performance of firms from different countries

4 Variables Influencing Accounting Standards Relationships Country Ties Inflation Econ Development Culture External Capital Which source is most important? Investors important - (US/UK) Banks important (Swiss, Germany, Japan) Government important (France/Sweden)

5 Variables Influencing Accounting Standards Relationships Country Ties Inflation Econ Development Political/economic ties can create accounting similarities US influences systems in Canada and Mexico EU countries are moving toward common systems Culture

6 Variables Influencing Accounting Standards Relationships Country Ties Inflation Econ Development Historic Cost Principle Assumes that the currency is NOT losing its value due to inflation Inflation affects asset valuation If high inflation assets may be undervalued If very low inflation assets may be overvalued Culture

7 Variables Influencing Accounting Standards Relationships Country Ties Inflation Econ Development Developed nations More sophisticated accounting systems Developing nations Inherited accounting systems from former colonial powers Culture

8 Variables Influencing Accounting Standards Relationships Country Ties Inflation Econ Development Culture Uncertainty Avoidance If High Uncertainty Avoidance Need for rules / regulations Tightly controlled (gov t) Japan, Mexico If Low Uncertainty Avoidance Readiness to take risks Strong auditing professions - Many companies do not follow the rules UK, US, Sweden

9 International Standards International Accounting Standards Board (IFRS Standards) Has 45 standards - compliance is voluntary 140 of 150 countries have made a public commitment supporting a single set of high quality global accounting standards. Albania, Belize, Bermuda, Cayman Islands, Egypt, Macao, Paraguay, Suriname, Switzerland and Vietnam have not.

10 Consolidated Statements Combine separate financial statements (two or more companies) to yield single set of financial statements (as if the individual companies were really one) Used by MNEs

11 Intra Firm Trade is HUGE Intra firm = Company imports/exports to itself, internationally Over 50% of U.S. imports were intrafirm (2009) Much variation: By Country 74% of U.S. imports from Japan were intrafirm (2000) 2% of U.S. imports from Bangladesh By Product Category 70%+ of U.S. imports of autos, medical equipment and instruments. 2% of U.S. imports of rubber and plastic footwear

12 Intra Firm Trade, Taxes, & Cash Many CFOs contend that U.S. tax policy conspires against a manufacturing renaissance. The country's high corporate income tax rate - highest in the world - has prompted U.S. companies to reinvest overseas much of the money they earn there, rather than repatriate it (bring it back to the U.S.) John Chambers, CEO of $40 billion computer networking company Cisco Systems, recently said that if his company could bring home the roughly $30 billion it holds in foreign countries without suffering onerous tax consequences, the company would boost hiring in the United States by 10%. Source: CFO Magazine

13 Why so much cash overseas? Taxes The U.S. taxes the foreign income of their firms These taxes can be deferred until earnings are repatriated Result - U.S. MNEs have incentive to retain earnings abroad Firms hold most of these funds in cash

14 Intra Firm Trade, Taxes, & Cash US Firm Cash Holdings Abroad = $1.4 trillion (11/2017) - Nov 22, 2017

15 Apple s Cash Hoard Overseas Apple s cash Q4, 2016 Source: CNBC.com UPDATE: NOVEMBER 2017 APPLE S CASH OVERSEAS NOW AT $268 BILLION But most of that cash is held overseas, and the company would have to pay 35% corporate income tax to bring it back to the US for its shareholders. Instead, the company is borrowing $17 billion and paying interest of around $300 million a year. Plus, the company can deduct interest expenses from its taxes, so it will effectively pay about one-third less, or closer to $200 million per year. The decision allows Apple to avoid around $8 billion in taxes (probably less) from bringing back $17 billion from abroad to pay investors.

16 Double Irish Dutch Sandwich (Alphabet) Google

17 Where in the World to Make Your Profit

18 Transfer Pricing Benefit by manipulating prices of intra-mne transactions Benefits include: Tax reduction Import Duty (tariff) reduction Foreign exchange controls Profit increase (if required by joint ventures)

19 Transfer Pricing & Performance Evaluation Transfer prices are designed to maximize profitability and currency flows, But they make an unbiased performance evaluation nearly impossible. Firms may establish transfer prices because of: differences in national tax rates tough competition in foreign markets anti-dumping legislation Internal transfer prices may also include the allocation of fixed costs, loans, fees, royalties, and other factors.

20 Example ABC Company ABC Corporation (USA) High tax 39.1% Stable currency Free funds movement Japan - Subsidiary High tax 32.1% Stable currency Free funds movement 1 Under-price or Overprice components from Japan to China JV? Under-price or Overprice finished goods from China JV to U.S.? 2 China Joint Venture Low tax 25% JV Profit pressures Stable currency Blocked funds Must comply with the arm s length principle

21 Arm s Length Principle Current open market prices Comparable open market prices Gross margin prices Acceptable range of gross margins achieved in comparable transactions between independent companies Operating profit methods Comparing period percentage operating profit or comparing operating profit on transactions rather than on a whole-company basis Any Reasonable Means

22 Scenario ABC Company ABC Corporation (USA) High tax 39.1% Stable currency Free funds movement Japan - Subsidiary High tax 32.1% Stable currency Free funds movement 1 Underpriced our components from Japan to China JV. Overpriced our finished goods from China JV to U.S. 2 China Joint Venture Low tax 25% JV Profit pressures Stable currency Blocked funds Assuming that we comply with Arm s Length What are the Pros and Cons of this approach?

23 Transfer Pricing Scenario If under price exports from Japan subsidiary to China Tax savings (Japan [High tax] to China [Low tax]) Little exchange risk Can repatriate funds quickly (but earn less in Japan) If over price exports from China JV to USA Pay lower tax (on less profit) in high tax country (USA) Little exchange risk Need to Repatriate funds from China later can alter transfer price U.S. market may get high prices -> price escalation U.S. duty rates may be based on higher rate

24 Transfer Pricing Objectives We need to identify company objectives: Where do we need access to funds? Where do we need to minimize tax liability? Where do we need to maximize profits? Where is price competition the most important?

25 Financial Management Investment Decisions Financing Decisions Money Management Decisions Capital Budgeting Estimating the cash flows associated with the project over time, then discount them to determine (NPV) net present value Adjust for political risk Economic risk - inflation

26 Financial Management Investment Decisions Financing Decisions Money Management Decisions Source of Financing Global capital markets Cost of capital usually lowest Government may require local sources to be used Local debt markets If expect currency depreciation then use local debt sources Structure (debt vs equity) Norms vary by country Local norms or home country? Minimize cost of capital

27 Financial Management Investment Decisions Financing Decisions Money Management Decisions Minimize cash balances Invest cash reserves Short term get lower interest Gains liquidity Long term get higher interest Low liquidity Reduce transaction costs Every time cash is changed from one currency to another Multilateral netting (next slide) reduces the number of transactions Reduces transaction fees

28 Multilateral Netting Cash Flow with 5 subsidiaries ($ millions) NEED TO SIMPLIFY Transaction Costs (1%) - Currency exchange - Transfer fees Total Transfers $75 million Total Costs $750, $6 Germany $2 $3 China $4 $1 UK $2 $3 $5 $3 $7 Japan $4 $3 Brazil

29 Multilateral Netting Reduce transactions (and fees for transfers) among subsidiaries Korea China Japan Taiwan How to do it? Develop a matrix shows all payments (columns) and receipts (rows) 1. Look at payments out from each, and total them (total for each column in matrix) 2. Look at receipts for each, and total them (total for each SIMPLIFY row in matrix) IT ALL 3. Subtract payments from receipts to determine the extent of net receipts (+) or payments (-) 4. Look at the negative numbers to determine who pays what to whom

30 Miscommunications - again Miscommunications Many forms Miscommunications Miscommunications especially sensitive when dealing with money, as we have seen