Lecture International business (11/e) - Chapter 21: Financial management and accounting

The main goals of this chapter are to: Explain capital structure choices and their impact on the MNC, describe the process of multilateral netting and its contribution to cash flow management, describe the importance of leading and lagging in cash flow management,...

Financial Management and

Accounting

chapter twenty­one

Learning Objectives

 Explain capital structure choices and their impact on the MNC

 Describe the process of multilateral netting and its

contribution to cash flow management

 Describe the importance of leading and lagging in cash flow management

exposure, translation exposure, and economic exposure

 Describe the basic idea of a swap transaction and its

applications

Learning Objectives

 Explain a currency swap contract and its usefulness to the financial manager

 Recognize the usefulness and dangers of derivatives

 Explain the role of and approaches to sales without money

 Identify the major challenges faced in international

accounting

 Describe the international accounting standards’

convergence process and its importance

Capital Structure of the Firm

• Retained earnings

• Debt

– Offshore financial center specializes in financing

nonresidents, low taxes and few banking

regulations

• Equity

– American depository receipts (ADRs): foreign

shares held by a custodian in the issuer’s home market and traded in dollars on the U.S exchange

Financial Management Decisions

• In what currency should capital be raised?

• How structured: equity, debt?

• What sources of capital?

• If capital market, which ones?

• Are other sources of money available?

• How much and for how long?

Cash Flow Management

• Multilateral Netting

– Subsidiaries transfer net intracompany cash

flows through a centralized clearing center

Cash Flow Management

• Leading and Lagging

– Timing payments early (lead) or late (lag),

depending on anticipated currency

movements, so they have the most

favorable impact

Foreign Exchange Risk Management

• Transaction exposure

– Change in the value of financial position created by

foreign currency changes between establishment and settlement of contract

• Translation exposure

– Potential change in value of a company’s financial

position due to exposure created during consolidation process

• Economic exposure

– Potential for value of future cash flows to be

affected by unanticipated exchange rate movements

Transaction Exposure: Hedging

• Hedging

• Forward market hedge

protect against foreign currency movement

• Currency option hedge

specific time to protect against foreign currency risk

• Money market hedge

lending in domestic and foreign money markets

Transaction Exposure: Swaps

• Swap contract

– Spot sale/purchase of asset against future

purchase/sale of equal amount in order to hedge financial position

• Bank Swap

– Swap made between banks to acquire temporary

foreign currencies

• Currency Swap

– Exchange of debt service of loan or bond in one

currency for debt service of loan or bond in another currency

Transaction Exposure: Swaps cont’d.

• Interest Rate Swap

– Exchange of interest rate flows to manage interest

rate exposure

• Spot and forward market swaps

exposure

• Parallel Loans

Translation Approaches

– Current rate method

• Current assets and liabilities are valued at

current spot rates and noncurrent assets and liabilities are translated at historic exchange

rates

– Temporal method

• Monetary accounts are valued at spot rate and

accounts carried at historical cost are translated

at historic exchange rates

Hedges and Swaps as “Derivatives”

• Contract whose value is tied to the

performance of a financial instrument or commodity

Sales Without Money

produced by use of developed country equipment

• Barter

services

Sales Without Money, cont’d.

• Switch Trading

– Use of third party to market products

received in countertrade

• Offset

– Trade arrangement that requires portion of

the inputs be supplied by receiving country

• Clearing account arrangements

– Process to settle trading account within

specified time

Industrial Cooperation

• An exporter’s commitment to a

longer-term relationship than that in a simple export sale, in which some of the

production occurs in the receiving

country (five methods)

Taxation and Transfer Pricing

• Income tax

– Direct tax levied on earnings

• Value-added tax (VAT)

– Indirect tax collected from parties as they

add value to product

• Withholding tax

– Indirect tax paid by payor, usually on

passive income

Taxation and Transfer Pricing

• Transfer Price

– The cost of intracompany sale of goods or

services

International Accounting

• Accounting and Foreign Currency

– Consolidation

• Process of translating subsidiary results

and aggregating them into one financial report

– Functional Currency

• Primary currency of a business

Cultural Differences in Measurement and

Disclosure for Accounting Systems

Use of International Financial

Reporting Standards

Triple Bottom-Line Accounting

• 3BL

– A results or impact report on the

environmental, social, and financial impacts

of the business